Purchasing commercial real estate such as retail buildings, office buildings and apartment buildings is a lucrative investment for those seeking financial rewards from rental income or property appreciation. While purchasing commercial property is a bigger risk than purchasing residential property, the income potential is greater if you approach your investment in a smart and prudent way.
Depending on the area of the property, the annual return of your investment will be between six and 12 percent of your initial purchase price – an attractive return indeed when compared to the one to four percent return of most single-family residential properties. To get the most from your purchase it is recommended that you acquire capital, either by saving or by a loan, to cover any initial maintenance costs that your property might have. For example, you will want your apartment building to have a functional dishwasher in every unit from the outset in order to avoid pricey repair costs in the future.
Remember to factor in ongoing maintenance costs too when searching for a property. Something will eventually break down, especially if you desire a property that will have a lot of tenant or customer traffic. Unless you have years of repair experience under your belt, you will need the help of licensed professionals who will competently fix any problem. Most commercial real estate owners recruit property management companies for assistance with maintenance, and these companies typically charge between five and 10 of rent profits for their services.
The good news is that commercial properties are often priced more objectively than residential properties. Compare the asking price of a commercial real estate property with the cap rate – the annual return expected from the property. Calculate the cap rate by first figuring out the net income (annual rent minus annual expenses). Ideally, you will want the rent on any given property to cover all your expenses except your mortgage. Next, divide the net income by the cost of the property to determine its cap rate.
Don’t underestimate the power of thorough research when hunting for properties. Ultimately, the economics involved in determining the true value of commercial properties is complicated. Take the time to browse the internet for informative articles that might prove to be invaluable when the time comes for you to make a decision. A quality website will inform you on everything from liquidly premiums to finding goldmine, undervalued properties.
Purchasing commercial real estate is well worth your time due to the substantial profit that can be made from your investment. The earned capital from a quality commercial property rivals the potential profit and savings of a quality home or apartment.