5 Steps to Evaluating a Commercial Real Estate Investment

By: Zack North

Looking to purchase commercial real estate? You’ll naturally want to make an educated decision, but where do you start?

Even when you consider the fact that every investor will have a unique set of needs and goals, there are a few general checklist items investors should know when evaluating commercial real estate opportunities.

Purchasing a commercial property is a big step, so make sure it’s in the right direction. Review these 5 key factors before moving forward with the transaction.

 

1.Market Trends:

 

Without a fully-functioning crystal ball, you won’t have the ability to foresee the exact return on your investment before you make your purchase.

But you can study market trends to gain a better understanding of what you can expect from your income-generating commercial property.

Let’s use a retail strip-center property as an example. Before you make your purchase, work to answer the following questions:

  • How strong is the local economy?
  • Are e-commerce businesses likely to eat into your tenants’ profitability?
  • Does the property have office space that can be converted to a shared working area to accommodate the needs of modern small businesses?

There are plenty of other questions to ask – the idea here is to evaluate your potential purchase within the context of the current marketplace.

 

2.Location:

 

Location is so important in commercial real estate that authors typically repeat the term 3 times whenever they write about it.

Location, location, location.

It’s a cliché, but the truth is that the location of your commercial real estate investment really is one of the most important factors of your purchase decision.

Let’s say you have your sights set on purchasing a multifamily apartment building. Take the following location-based factors into consideration as you hunt for the best opportunity:

  • Proximity to schools
  • Proximity to public transit
  • Average household income in the area
  • Visibility from the street
  • Crime rates

While this sounds like further market analysis, not all of it should take place online. Spend time at the location and see it from a consumer’s perspective. An investment opportunity that looks great on paper may leave you with a far different impression once you examine the building and surrounding area.

 

3.Potential for Income Generation:

 

A property’s ability to generate income will matter a great deal to both you and your lender, should you choose to secure a commercial mortgage. You have a number of methodologies available to help you run a multifamily, office, or retail property’s cash-flow analysis.

Consider taking that analysis a step further by unearthing any additional opportunities a property has for income generation.

Are you able to supplement your multifamily property’s monthly rental income by placing a small convenience store in the lobby?

Could you provide additional value for tenants by selling onsite storage space?

You’ll know you’ve landed on a good opportunity when the value for tenants equals the additional return on your investment.

 

4.Appreciation:

 

No one can truly know whether a commercial property will appreciate in value over time. But after performing your market trend analysis, location review, and cash-flow analysis, you may be able to see the future with a bit more clarity.

While the economy will play a major role in the value of your commercial real estate investment, you can also add value by updating the look of your property or improving its ability to generate revenue by adding additional units or employing one of the income-building tactics listed earlier.

Note that your opportunities for adding value in this way may be limited by your property’s location, as well as applicable city and/or state regulations.

 

5.Your Own Financial Goals:

 

Above all else, evaluate a potential commercial real estate opportunity based on your own financial objectives – both short and long term.

Are you looking to own a property for many years, or do you have a fix-and-flip strategy in mind?

Are you interested in performing property management duties yourself, or would you rather be less involved in day-to-day operations?

Your specific needs should always guide your investment decisions.  When you view opportunities through that lens, you will find it easier to eliminate options and narrow your focus.

Taking the Next Step:

Once you identify the perfect commercial real estate property, your next task may be to select the ideal financing partner.  This is where we can help.

Our team at Commercial Direct can provide you with a flexible loan that works for you, even if you can’t provide the types of documentation traditional lenders require (like tax returns).

Visit our Purchase page today to learn more about our financing options for investors like you.

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Author: Zack North

Zack North is the Director of Marketing for Commercial Direct.  As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.

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