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Commercial real estate is generally thought of as the golden goose of investment. Often touted as a market that can’t fail, many of the most successful investors have some form of commercial real estate properties within their portfolios. Owning an income-producing property isn’t just for veteran investors, of course. Commercial real estate, if approached correctly, can be a solid starting point for even newcomers to the investment world — so long as they qualify for financing.
Even so, while investment properties can be both exciting and impressively profitable, investing in real estate can be a daunting task for a first-time investor. Commercial real estate isn’t for investors with a day-trader mentality. Even discounting those factors outside an investor’s control, a potential investor must consider multiple facets of an investment opportunity before executing, as many things can significantly impact returns.
It is in that respect that it's important for potential investors to do comprehensive research before making an investment decision. To help guide a thoughtful strategy towards investing in an income producing property, here are some of the most important considerations that an investor should keep in mind.
Everyone, by now, is probably tired of hearing the same old “location, location, location” schtick as soon as real estate investment is mentioned. But while it may seem like a stale bit of painfully obvious advice, the neighborhood that an income-producing property resides in largely determines the types of tenants the property will attract as well as the vacancy rate — which are factors essential to creating a good investment strategy.
For example, properties in college towns typically have a higher percentage of student tenants. While this roughly equates to a steady source of tenants, the inherent seasonality of school schedules could lead to seasonal vacancy issues.
2. Property Taxes
Uncle Sam will always get his cut. This is true regardless of whether an investor plans for it or not. Understanding the property tax situation in the area of a potential investment is an often underrated part of an investment strategy.
Property taxes are not a static figure across the board either — they can vary widely across a target market. Particularly in the case of comparing two or more possible acquisitions, investors will want to be aware of how much they will potentially be losing. That said, high property taxes are not necessarily a bad thing. Typically, high property taxes occur in more desirable neighborhoods — the types that commonly host Class A assets — though investors should be aware that many less-appealing areas also boast high taxes.
Either way, finding out what kind of taxation to expect is a relatively simple matter. The municipality's assessment office should have all relevant tax information on file. Conversely, it never hurts for potential investors to talk to the business owners and homeowners in the target community. This includes determining if property taxes are likely to increase in the near future. It isn’t uncommon for townships or municipalities facing financial hardships to raise taxes as the need arises.
3. Future Development
Future-forward thinking shouldn’t only apply to an investment property but to its surroundings as well. Keeping aware of current and potential growth in an area can greatly benefit investors. Visiting the municipal planning department can yield information on developments and project plans that have already been zoned into the area.
One important consideration is the amount of new construction in the area. Lots of new planned projects and those still in development typically represent an area of substantial growth. New housing means new potential tenants — or stiff competition, depending on the nature of the commercial property. Identifying future competitors alone can make a world of difference for an investment strategy.
4. Current Listings and Vacancies
A little sleuthing goes a long way when it comes to listings and vacancies. If an area has a high or growing number of listings, it could be attributed to a seasonal cycle — or a sign that the area is in decline. Either way, knowing can be extremely valuable. Then, there is also the matter of understanding the rent climate as well. High vacancy rates usually lead to lower rent demands in an effort to attract tenants while low vacancy rates typically pave the way for higher rents.
Rental income is a key contributor to an investment’s profitability, so it behooves investors to know the target area's average rental rates. Investors still deciding on the right property to acquire should make sure any property under consideration can collect enough rent to cover the expenses that go into an acquisition. A deep-dive analysis of the area should be done to gauge where rent prices may be headed in the foreseeable future. Predicting rent scenarios is by no means an easy or exact science, but entering a project with some decent insights as to how rent asks have performed historically can keep an investor ahead of the pack.
There is no one, single playbook for making all the right decisions when it comes to commercial real estate investment. Choosing an income-producing property takes significant research and strategy. There are amazing opportunities to be found across the country — spanning every asset class and metropolitan statistical area. Investors must be willing to put in the legwork and be mindful of all of the different components surrounding investment properties. Setting realistic expectations goes a long way, and these five key considerations should help keep your investment strategy anchored in reality.