Do your homework before investing in commercial real estate

According to Money News magazine, people often invest in commercial real estate in order to diversify their portfolio from stocks and bonds. Investing in commercial property sometimes offers significantly higher yields than bonds while providing a hedge against inflation. Some chose to invest indirectly in commercial realty by buying shares in a Real Estate Investment Trust (REIT). Other people have a preference for investing directly in commercial properties.

Commercial properties, as opposed to residential properties, are those that are leased out for workspace rather than for living space. Commercial real estate would include office buildings, malls, strip shopping centers, restaurant buildings and industrial properties. As noted in Investopedia, in most cases commercial properties "are sold by the building-one office building, one restaurant, one factory, etc."

According to Conversations Magazine, the principal attraction of investing in commercial real estate is as follows: Investors receive monthly rent from long-term tenants while owning an asset which will appreciate in value. If investors are willing to hold on to commercial realty long term, they will be able to pay down the loan on the purchase-thanks to the monthly rental payments-thereby creating greater equity. Consequently, the investor will receive a greater return on the initial investment when he or she eventually decides to sell.

Like any investment, there could be disadvantages to owning commercial real estate. For example, Investopedia notes that a tenant will often have special requirements that end up causing the landlord to spend considerable sums of money to refurbish a space to meet a tenant's particular needs. Refurbishing spaces could become an expensive proposition if it is generally required each time a new tenant comes aboard. It is possible that a person could own an office or retail building with a low vacancy rate and nevertheless end up losing money due to high tenant turnover leading to monies constantly being expended to make renovations for incoming tenants.

Evaluating property

Inc. magazine notes that there are a number of factors to consider when looking for suitable commercial real estate to purchase. Of critical importance is choosing commercial property that is located in an area that tenants will actually desire to locate to. In addition, you need to determine:

  • The physical condition of the property.
  • Whether the property poses any potential environmental issues.
  • The allowable uses under the zoning laws.
  • The adequacy of access and parking.

Before buying commercial realty you should take a good hard look at the local economy. Local economic strength and job growth trends can be predictors of demand for office and retail space. A booming economy producing jobs can result in a greater demand for office and retail space and command higher rentals.

A thriving and growing local economy may cause you to pay a premium price for a commercial building. By contrast, a somewhat depressed local economy can mean that commercial buildings can be had at bargain-basement prices. Unfortunately, if you end up struggling to keep commercial space filled, buying a commercial building at a rock bottom price could ultimately prove to be a bitter bargain.

Seeking legal assistance

If you are considering investing in commercial real estate, you should contact a Delaware law firm experienced in handling real estate transactions. An attorney can assist you by reviewing the contract of sale and helping you navigate the myriad of details that can accompany a closing on commercial real estate.