If you’re hoping to invest in commercial real estate, you probably know the importance of researching each project. However, if you’re inexperienced, you may not know precisely how to do your due diligence. This guide points out a few factors successful investors consider in evaluating an investment.
Determine the Gross Revenue Potential
A vital factor to consider in any commercial real estate investment is the potential gross revenue. This is the sum you’ll make on the property once tenants have fully occupied it. To state the obvious, that gross revenue sum will have to be greater than the expenses you’ll have to pay out each month. This includes mortgage payments, insurance, and maintenance, among other monthly fees. One strategy to finding a lucrative investment is when the gross revenue is lower than its potential for whatever reason. This is called a value add opportunity. It could be that a multifamily building has below market rents or that a commercial building could upgrade a key tenant to drive an upgrade in the entire complex. Whatever the opportunity may be, determining where the gross revenue potential is not optimized can be a great strategy.
Choose a Niche
Commercial real estate is a broad term that encompasses several types of properties, including office space, industrial properties, retail space, and multifamily properties. It’s best to narrow your focus to one of these niches so that you can become well-informed about that particular area of commercial real estate. This is important because these areas have enough complexity that you will want to become an expert to successfully identify good opportunities when they arise.
Study the Market Cycle
Even though commercial real estate investing is generally lucrative, it isn’t impervious to market changes. When you take the time to study how the local market fluctuates, you can better predict when property prices are apt to rise or fall. This will help you buy when the market dips. Otherwise, you may mistakenly buy a property when the market is at a high, which will cost you later when you’re looking to sell.
Research the Red Tape
It’s also important to do your research regarding any permits you’ll need for your project. This includes ensuring the property won’t violate zoning laws and confirming you can get the right licenses to update an existing structure. You should also consider the number of professional services you’ll need to complete your project (lawyers, plumbers, electrical contractors, etc.) and add their fees to the investment’s total cost.
While this may seem like a great deal of work, doing exhaustive research for each project will help you make wiser investing decisions. Over time, you’ll develop a process that makes it easier to get everything done and evaluate every commercial real estate project with the intuition that experience brings.