We all know that one of the most common forms of investment is in the real estate sector which is divided into two categories – residential and commercial real estate.
If we talk about Commercial Real Estate, it includes constructions such as retail buildings, office buildings, industrial buildings, apartment buildings, and mixed-use buildings. It is an attractive investment choice as it offers so many advantages like consistent returns, passive income, and growth potential.
So, it is not as difficult as it may appear. Keep some of these points in mind while investing in commercial real estate:
Location Is Everything
Location is most important when it comes to funding in commercial real estate. Many aspects come into play such as accessibility to roads and public transport, distance to neighboring cities, and infrastructure projects currently in development in the area. Investors should also conduct an in-depth verification of the property to gain a better understanding of the potential or liabilities it comes with.
Commercial properties offer a return on two things – rent and capital appreciation. Both are strongly dependent on the location. Search for places where the vacancy rate is less than 5%.
Quality Of The Property
There can be two-three buildings in a particular location, but one with the highest quality will always get rented first. It will also appeal to good tenants. Multinational tenants are always inclined to pay a premium for quality. So, if you are looking for boutique ultra-premium commercial properties or prime developed real estate areas to invest in, ICP, the real estate arm of KCT group.
Additionally, look for certifications like LEED gold or platinum ratings or buildings that have beautiful looking lobbies, more elevators, higher ceiling height, and scenic views.
Quality Of Tenant
An excellent tenant has the potential to relatively increase the cost of a commercial property. If your tenant is good, s/he will pay rents on time, pay higher deposits, stay longer, and increase the value of the property.
There are various factors you must consider when investing in a building with existing tenants like their sales on a monthly and annual basis & the rental period, which is another important factor that one needs to assess.
Interior Fit-Outs
Make it a note to always ask who has done the interior fit- outs in the property. Most of the time when an office is constructed, it is delivered bare shell. It is the tenant who has to do the flooring, ceiling, air conditioning, wiring, interior cabins, and so on depending on the requirements. Some tenants like to do their set-ups on their own while others ask the developer to do it for them.
Property Documentation
Go through all the documents very carefully. It is necessary because it will help you in understanding all the legal work to be undertaken by the investor. It has documents related to mortgage and ownership transfer in case there is re-selling of the property.
Do not forget to check the hidden charges (if any) in the property papers and sale agreements by the seller and broker.
Security deposit
Security deposits differ between 10 and 12 months’ rent in commercial properties. Pay attention when a tenant proposes 6 months or less because that means they might consider a short-term option or have cash flow problems.
Market Dynamics
It is significant to look at the dynamics of the type of property you choose. So if you’re seeking to invest in retail, consideration should be given to the short-term & long-term impacts of e-commerce on tenant and consumer demand. Ideally, you must invest in commercial property in an environment with low-interest rate, which supports your demand for both property and borrowing.
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