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Questions Entrepreneurs need to ask Before Investing in a Commercial Property

11 Jun 2021

Real estate is usually considered as a low-risk asset class because the volatility of real estate returns is relatively low as compared to other investment options. Consequently, commercial real estate (CRE) investments prove lucrative for entrepreneurs as CRE yields higher returns than residential properties. Entrepreneurs can invest surplus funds into CRE and earn short-term revenues by renting or leasing the property. Alternatively, they can decide to use the property for business purposes and save on the rent they were previously spending.

Over a significant period, entrepreneurs stand to gain substantial earnings through property appreciation. They can then choose to liquidate the commercial property and use their earnings for business growth. Before deciding whether CRE investment is a good option for them, entrepreneurs must consider these four questions:

1. What is the entrepreneur’s investment objective?

While buying a commercial property, an entrepreneur has multiple options to make the investment based on the time span within which he or she wishes to realize profits. One can choose to buy and hold the property for annual returns or buy a property and sell it in a few years to realize a profit. The entrepreneur must consider both options to find out how much return or profit each option will yield.

Some entrepreneurs invest in CRE for tax purposes. This objective must also be considered. Before any commercial real estate investment is made, entrepreneurs must have a detailed plan of their investment goals.

2. What are the entrepreneur’s commercial real estate investment constraints?

It is a well-known fact that while CRE might offer a higher yearly return, it also requires a higher initial investment. Also, commercial properties that are situated in prime locations are likely to be higher-priced. An entrepreneur must evaluate how much of an investment he or she is prepared to make and how much of a return are they expecting and in how much time?

The answers to these questions will help narrow down on the location, type and market that suit the entrepreneur’s investment profile.

3. What type of CRE would be an ideal investment?

CRE encompasses a wide range of property categories. From tech parks and warehouses to industrial clusters and malls, the choices are endless. Entrepreneurs can also choose a commercial property in a mixed-use building that combines offices with residential apartments. Each of these types of commercial properties has their unique benefits, level of involvement required by the investor and most importantly, suit different budgets.

4. Are there any other ways of investing in CRE without buying a physical property?

Entrepreneurs can consider investing in a REIT, or Real Estate Investment Trust that are shares in a company owned income-producing real estate. Like mutual funds, REITs provide investors of all types regular income streams through rent generation and property appreciation. In turn, shareholders pay the income taxes on those dividends. REITs allow anyone to invest in large-scale properties the same way they invest in other industries – through the purchase of stock without having to go out and buy or finance property.

Entrepreneurs can invest in CRE as a good way to diversify their business profits into an additional profit source. Over time, CRE values climb higher and higher. Thus, making a long-term commercial real estate investment can help an entrepreneur accrue maximum profits. Most importantly CRE investments act as a hedge against inflation. While everyone fears inflation as prices increase, a property owner stands to benefit heavily as the price of the property also rises. To make profitable commercial real estate investments, entrepreneurs must treat it like a new business and develop it as it ages. The payoff over time is well worth the journey.

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