Before Buying Commercial Investment Properties
Tuesday, February 3rd, 2015
By: Steve Goldman, CCIM
Why put money in commercial investment properties, especially multifamily or net-lease properties? It allows you to diversify your investment portfolio, which can help protect it from economic downturns. It also allows you to create multiple income streams, some of which may be considered passive income, requiring little or no oversight.
To get great returns, you need to understand what makes a real estate investment great and focus on the three Rs: right building, right location, right time. Here are some things to consider before you begin investing.
It’s a Get-Rich-Slow Scheme
Investing in commercial real estate won’t bring you instant income, despite what you hear on late-night informercials. It’s a long-term investment strategy, one that can span decades or even lifetimes. So before you jump in, take time to educate yourself. If we had to recommend one book to start your investment career, it would be Rich Dad, Poor Dad. But we also recommend following blogs, expanding your library and even taking classes if that’s your thing.
Plan the Work and Work the Plan
Work with your broker to plan your investment strategy. Consider how much time you have to put toward your investments, how much money you’d like to spend and how long you’d like to invest for. Where would you like to see your portfolio in 5 years, 10 years or at retirement age?
Choose the Property Type
Goldman Partners Realty specializes in two types of commercial investment property, multifamily and net-lease, though we have extensive experience in other property types, as well. In all, our team has over 123 years of combined experience as commercial realtors.
The multifamily segment includes apartments, duplexes and even rental cabins, and investing in these properties can result in a growing empire of real estate holdings that generate regular monthly income. This type of property requires property management, so it’s not completely hands-off, but it’s a great investment strategy for creating an income stream that doesn’t require full-time oversight, especially if you use some of your income to hire a property manager.
Net-lease properties – you may also know these as triple net lease properties or NNN properties – come in a variety of flavors: single net (N), double net (NN) and triple net (NNN). These properties range from dollar stores to auto parts sellers to standalone pharmacies. In this type of investment, the tenant pays part or all of the building taxes, insurance and upkeep.
There are some things to consider, like type of building and location, but with the right property you could set yourself up to receive what we call mailbox money – a check that comes to your mailbox every month, that requires no work on your part.
There are other types of investment properties, from offices, to medical buildings, to restaurants and even land. We can help you determine which type is the best fit for your lifestyle and portfolio.
Pick the Right Neighborhood
The same “location” rule that applies to residential housing applies to commercial investment property. With commercial properties, it’s also important to consider demographics, traffic count, parking availability and proximity to shopping or amenities.
For example, if you want to invest in dollar stores, buy one in an area that will allow the store to be remarketed, should the lease end and the original tenant move out. Would the area support another type of store in that location?
With multifamily investments, being near good schools can be important, too.
Learn About Vacancy Rates
What’s a vacancy rate? That’s the portion of your building that is not currently leased, i.e., the spaces that are vacant.
If you’re investing in an office, commercial building or apartment complex with multiple tenants, a high vacancy rate can hurt your bottom line. While vacancies are a normal part of owning an investment property, it should be your goal to minimize them.
Organizations like realtor.org report regularly on vacancy rates across the nation, and before you buy check the average for your area. That will help you create a realistic operating budget and determine whether the building needs to be renovated or remarketed to bring in more (or better quality) tenants.
Run the Numbers
Like your home, commercial properties incur expenses. Taxes and insurance are part of these, plus things like a new roof, leaky pipes or even parking lot repaving.
Before you purchase any commercial investment property, a good broker will help you prepare an estimate of the operating income and expenses. In this way, you can make a clear evaluation of whether the property is worth purchasing. Many times, you may like a building that just doesn’t work when you run the numbers.
As part of its service to clients, Goldman Partners Realty provides you with a broker opinion of the price, counsels you on market rates and helps you prepare initial operating reports to determine whether the property is a good investment.
Hire a Property Manager … Or Not
Hiring a property manager may seem like a huge investment or even a waste of money. But consider that they’re the ones collecting late rents or answering 2am calls from a tenant when the heat goes out.
A property manager can cost 5-10% of your monthly rent. So if you enjoy a hands-on approach to your properties (and many investors do) then managing them yourself can save you money.
However, a great property manager can help reduce vacancies and will also have systems in place to make the building run more efficiently, saving you money in the long run.
We recommend figuring one into your expenses then, if you decide you don’t want to use one later, you can remove that line item from your budget and use it elsewhere.
Be Your Own Bookkeeper … Or Not
Like property management, this is an area that many investors enjoy doing on their own. But it’s not simple – there’s a lot of paperwork involved in investment property – so unless you have a knack for numbers, we recommend hiring this out.
In addition to making your life easier, it also simplifies tax filing.
Begin With the End in Mind
It may sound odd to start a business by thinking about how to end it, but like creating an overall plan, having an exit strategy is an important part of any investment process. Why are you buying this property? What will you do when the market rises? Falls? When will you pay it off? Will it become part of your inheritance to pass down to the next generation?
This type of long-range context can be an important guide and it can keep you true to your goals.
If you’re interested in learning more, send us a note or give us a call. We want to help you make the best investment for you.
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