Commercial real estate (CRE) investment offers many rewards and benefits to investors. Compared with other asset classes, commercial properties have a better return on investment and ensure a relatively consistent stream of income. With attractive lease agreements which offer impressive returns, CRE is the choice for many first-time investors.
Here are five tips that will help you get started in commercial real estate investing:
1. Due Diligence
CRE investment calls for a fair share of due diligence as it helps you verify if the property is a viable investment option. Make sure to check the developer’s credentials, access to public transport and property management of the project. In case you are opting for a retail option, carefully consider the frontage, foot-fall, and demand from catchment areas.
The location of your chosen property must be easily accessible with quality infrastructure and presence of high-profile companies. You will find it easier to find tenants and financial support from banks for properties in prime locations. A commercial office in a prime location increases any firm’s visibility and reputation and will find many takers.
3. Rental Yield
The income that can be generated from a commercial property is what determines its value. First-time investors tend to ignore rental yield and instead focus only on capital appreciation. However, rental yield is a very important parameter as it represents a return on your investment. When choosing a commercial property, make sure it can generate a rental yield of at least 11-12 percent.
Maintenance is a vital factor to consider specifically for properties that have multiple owners such as a shopping complex or an office building. Ensure that there are no operational risks involving building maintenance issues that may impact the rental value of the commercial property. Before investing in such a property, see to it that the property’s upkeep is taken care of either by the builder or an external agency.
Before foraying into the complex world of commercial real estate, it pays to understand the common key metric used to assess properties:
• Net Operating Income (NoI): Configured before taxes, NoI gives you an idea of how much you will make from an investment minus all necessary operating expenses to run and maintain a commercial building.
• Capitalization Rate: It provides investors with an estimate of future profits or cash flow and is the ratio of net operating income to property asset value.
• Cash on Cash: It’s the measure of return on the actual cash invested and gives an accurate assessment of how your investment has performed.
While investing in commercial real estate, pay close attention to economic cycle that can impact lease rentals and absorption of new developments. Commercial real estate is a highly profitable and rewarding investment with a long-term horizon. With our experience and deep understanding of the commercial real estate market, Citadel can help you pick the right properties. Get in touch today!