Purchasing commercial property can often require a much different approach than buying a residential home for your family. While it’s tempting to buy with your heart, commercial property investment can require more use of your logic, since your goal is to make money.
However, not everyone is aware of what makes a ‘good’ investment property. Before you start shopping, take a look at the information below, which may provide a sound foundation for further research.
A commercial property cap rate, or capitalization rate, is a figure that can help you establish what you can earn from your investment each year. To find your answer, you can use a cap rate calculator online and input information such as the property value, yearly earnings, and yearly expenses.
Once you have your cap rate, you can use it to understand the property’s value in relation to its neighbors, identify ‘under the radar’ opportunities, and gain a picture of larger market trends. The average retail cap rate in 2020 was 7.23%.
Most people purchase commercial buildings to make a profit. What you make on commercial tenants can cover your mortgage and expenses, and hopefully leave you with money left over.
You may be looking at a potentially profitable commercial property if the annual returns are more than sufficient to cover your current and future costs. Depending on the area and external factors, many commercial property owners enjoy a comfortable lifestyle courtesy of annual returns of between 6% and 12%.
For a commercial building to be profitable, it needs to have tenants. While short-term tenants can plug financial gaps, a sounder investment can be a property with long-term or permanent tenants in place.
Long-term tenants may provide you with financial stability through the highs and lows of the commercial property market. When you take over ownership of a building with tenants in place, you may be able to carry on the lease they already have or put a new one in place. There are four common commercial property lease types: single net, double-net, triple-net, and gross lease.
Not all commercial properties are made equally, with some more desirable and profitable than others. When you weigh up the pros and cons of buildings with one tenant or multiple, keep in mind the level of risk associated with the canceled lease of premises with one occupant.
For example, if you owned a purpose-built car dealership yard and the business closed, you have 0% occupancy. You now face the prospect of no income from that property until you find another company with the same property requirements to take over the lease. That can take time.
Sometimes, one of the best commercial properties to invest in is one with multiple tenants. If one leaves, you can still fall back on the income of the others.
There is no way to know with any certainty that a commercial property is a good investment, especially with so many ways to measure its potential. However, by looking at the cap rate, income potential, and tenants, you may be able to see which commercial properties stand out more than others.
