Commercial Property Investment: a Beginner’s Guide
It can be daunting trying to understand the many things you need to know when looking into commercial property investment.
Commercial property investment has become an increasingly popular option for those seeking to grow their wealth. Investing in commercial property can provide a steady source of income, capital appreciation, and long-term security. However, it can also be a complex and challenging process that requires a deep understanding of the market, as well as the ability to navigate legal and financial hurdles.
In this blog, we will explore the ins and outs of commercial property investment, from identifying profitable opportunities to maximising your returns. Whether you’re a seasoned investor or just starting out, this blog will provide valuable insights and practical advice to help you achieve your investment goals.
We’ve also recorded a 2 part series on our podcast Revolve Commercial Property Podcast which you can listen to below:
Revolve Commercial is the number one destination for people who want to work with a commercial real estate buying agency. We make property investment easy and hassle-free because we give our clients a priceless foundation of knowledge from which they can build their portfolio. And we don’t stop at education. Contact us or Book a call. You can even sign up for our free Commercial Property Masterclass webinar now!
Property Investment Tips
When looking to buy commercial property, it’s important to be prepared. That’s why we’ve put together our top commercial property investment tips to help you on your way.
Check that the yield and potential future earnings are cash flow positive
When looking for a commercial investment property, one of the first things to do is “run the numbers”.
This means contacting the commercial real estate agent and requesting the financial figures. There could be well over 10 different financial figures you want depending on the type of property. The main figures you’re after include property sale price, outgoings and tenancy rentals.
From there, you can run the numbers with specific calculations, designed to determine if your commercial investment property will generate positive cash flow.
If you’re new to the game, knowing what figures to request and how to run the numbers is where a mentor or buyers agent can show you the ropes – so book a call today to find out how we can help you.
Get a good feeling for the kind of commercial space you are potentially buying into
Where possible, see if you can speak with the current tenant. Questions to ask them include:
- How long have you been here?
- Do you like being here?
- How do you feel about the property and the way it is managed?
- Do you intend on staying here and for how long?
- Are you happy with the current state of repair of the property and does it suit your needs?
You may also consider doing a drive-by during your tenants’ busiest times to gauge how functional the complex is, the volume of foot traffic, and how happy the customers are. For example, you may visit a cafe that is a tenant of a commercial building you are considering buying.
While ordering food and talking to the tenant, you might overhear a group of regular customers talking about how they love coming back for the gluten-free carrot cake. Knowing that the cafe has satisfied returning customers gives you a confidence boost as a potential commercial property investment.
Do your research on the area
When looking for commercial real estate to invest in, it is important to know what future the neighbourhood may impact your investment’s viability.
You may be looking at a business or commercial building that seems to have a monopoly on the area it’s in which would make it a solid investment.
But one way to determine this is to call the local council and ask about any planned developments for the area.
For example, knowing that a new hospital, university and entertainment precinct are in development planning stages, can give you the confidence to know that more jobs will be created, increasing the likelihood of further foot traffic to your potential tenants.
Your commercial real estate due diligence checklist
When visiting the commercial property you’re interested in, it’s important to do your due diligence, and our due diligence checklist will help you with that! You can even download our due diligence checklist here.
Speak to the current tenant
Talking to tenants is an important part of due diligence when considering a commercial property investment. Tenants can provide valuable insights into the property and the surrounding area that may not be immediately apparent from other sources. Here are a few reasons why talking to tenants is important:
- Understand tenant needs: Talking to tenants can help you understand their needs and expectations. This can help you determine if the property is meeting those needs and identify any potential areas for improvement. This information can also be helpful in negotiations with tenants, particularly if you plan to make changes to the property.
- Evaluate lease agreements: Talking to tenants can help you evaluate lease agreements, including their terms and conditions. You can learn about any challenges the tenants have experienced, what they like and don’t like about the property, and whether they plan to renew their lease when it expires. This information can help you better understand the risks and opportunities associated with the investment.
- Evaluate tenant mix: Talking to tenants can help you evaluate the tenant mix in the property. You can learn about the types of businesses that are occupying the space, their level of success, and their plans for the future. This information can help you determine whether the tenant mix is stable and if there are opportunities to attract new tenants to the property.
- Understand the surrounding area: Talking to tenants can also help you understand the surrounding area. They can provide information about the local market, including the competition, the demand for commercial space, and any upcoming development projects. This information can help you determine whether the property is located in a desirable area and whether there is potential for growth in the future.
Take photos and videos
Taking photos and videos as part of due diligence is another important step in the commercial property investment process. Here are some reasons why:
- Record keeping: Photos and videos can be used to document the current condition of the property, both inside and out. This documentation can be invaluable during negotiations and can be used as evidence to support any claims about the condition of the property.
- Better understanding: Photos and videos can help you better understand the layout of the property, the condition of the building systems, and any areas that may require repairs or upgrades. This information can help you identify any potential issues that may need to be addressed, and can also help you develop a plan for future upgrades and renovations.
- Remote viewing: Photos and videos can also be useful for remote viewing, particularly if you are not able to physically visit the property. This can help you save time and money by allowing you to evaluate the property from a distance before making a decision to invest.
- Documentation for investors: If you are seeking investment from other investors, photos and videos can be useful tools to demonstrate the condition of the property and the potential for growth. This can help you attract more investors and secure the funding you need to move forward with the investment.
Here is your commercial real estate due diligence checklist that highlights the areas you need to pay close attention to:
- Parking areas
- The number of available parking spaces
- The parking fees
- Rubbish removal areas
- Entries & exits
- Meters (water and electrical)
- Wet areas (kitchens, bathrooms and ceilings)
- Electrical outlets (including air conditioning, heating, fans and power plugs)
Sometimes you’ll find a property that has unused, open space. This area may have the potential for development and increasing your monthly cash flow, as it could be repurposed for storage space, extra parking or additional tenancy.
Pay attention to the details
In addition to talking to tenants and taking photos and videos, there are several other things to do in regard to due diligence when considering investing in commercial property. Here are some key steps to consider:
- Review financial statements: Reviewing financial statements is a crucial step in due diligence. This can include reviewing the property’s income and expense statements, rent roll, and any existing leases. This information can help you determine the property’s cash flow and potential for future growth.
- Conduct inspections: It’s important to conduct a thorough inspection of the property, both inside and out. This can include reviewing the physical condition of the building, the quality of the construction, and the condition of the building systems. A professional inspection can help you identify any issues that may require repairs or upgrades.
- Research the local market: Researching the local market is also important. This can include reviewing market data, vacancy rates, and the competition in the area. This information can help you determine whether the property is located in a desirable area and whether there is potential for growth in the future.
- Check zoning and permits: Checking zoning and permits is another important step. This can include reviewing any zoning regulations that may affect the property, as well as any necessary permits or approvals required for renovations or upgrades.
- Review legal documentation: Finally, it’s important to review any legal documentation related to the property. This can include reviewing any existing leases, easements, or other agreements related to the property. This information can help you identify any potential legal issues that may need to be addressed.
How to make an offer on a commercial property
Before making an offer on a commercial real estate opportunity, be sure that you have completed the following:
- Run the numbers for positive cashflow
- Conducted due diligence of the external and internals of the building
- Researched the local council’s future developments for the area
- Financially ready with funds available
- Partnered with trustworthy, professional team to assist with legal and financial paperwork
Ready to get started but don’t want to go it alone? Find out how we can help you buy commercial investment property today!
We’ve built our business on helping people achieve their goals so they can live the lifestyle of their dreams. We will guide you, step by step, through investing in cash-flow-positive commercial real estate. The best part? It’s easier and less expensive than you might think. Contact us today or book a call to take the first step on your commercial property investment journey!