Important Reminders to Know Before You Invest in Commercial Real Estate

Commercial real estate can be a sound investment, but as with all investments, you need to carefully consider your options and ensure you choose property that will offer a sound return. Buying commercial real estate as an investment is not like buying residential real estate, as the value of this property is measured differently and it carries certain challenges not found with residential properties. Consider some important reminders about investing in commercial real estate before you decide to purchase.

1. Square footage is key for vacant buildings.

Commercial real estate is typically valued by its useable square footage. This is because commercial tenants will want to build it out according to their own use, which will vary greatly from company to company and industry to industry.

This is different than residential property which is valued by square footage as well as upgrades, amenities, and the like. Someone accustomed to investing in residential real estate may find it a challenge to change their mindset when investing in commercial real estate, as they need to set aside the overall appearance of a building, the condition of the carpet, and things like these. The square footage is the fundamental factor in valuing vacant buildings and these types of properties.

2. Cap rates are important for income-producing properties.

The cap rate or capitalization rate refers to the potential income of commercial properties that are purchased for the sake of generating rent; these would include apartment complexes, strip malls, and commercial office buildings. The cap rate takes into consideration the expected vacancy rate and other factors that may affect the cash flow these buildings produce.

Anyone interested in these types of commercial properties needs to understand how the cap rate is determined and needs to understand all of these factors as they will affect the property's overall value.

3. Neighborhood farming can help determine if a building is a good buy.

Here, farming refers to getting information about a property from properties surrounding it. By noting the success or profitability of other buildings near a commercial property, this can tell a potential investor if they can expect a healthy return.

As an example, if a strip mall down the street from a vacant strip mall has little foot traffic, this is not a good sign for the vacant location's potential business. If however the occupied strip mall experiences healthy business every day, this can signal the potential for success for the vacant strip mall.

Consider these three factors when looking to invest in commercial property, to protect your overall financial interests. For more assistance, talk to companies such as NAI Norris Beggs & Simpson.