10 Things to Consider When Investing in a Commercial Property
Investing in a commercial property is a whole different ballgame than investing in a residential property. This is not a place you would be living in or renting out for others to live in. Instead, this would serve as a commercial hub absorbing the benefits of its surroundings.
As such, a myriad of factors come into play while making a wise, conscious decision of where and how to invest your money when it comes to commercial properties. Having an in-depth analysis of all the factors would mitigate risks, increase the value of your property, and bring in more profit.
However, before we find out about these factors, let us first understand why investing in a commercial property is better than doing the same in a residential property.
Benefits of Investing in a Commercial Property over a Residential Property
In case you are wondering, a commercial property can refer to warehouses, office buildings, industrial buildings, apartment buildings, retail stores, farmland, hotels, garages, malls, and medical centers, among others.
These are viable options for investment than residential properties because of the following reasons.
Commercial properties can bring 6-12 best annual returns off the purchase price in comparison to residential properties that can yield 1-4 best at best. This is especially true for volatile situations such as the post-pandemic world.
Scientific Price Evaluations
Evaluating the prices of commercial properties is more scientific since you can get a receipt of the owner’s income statement and decide on the final price. Very often, residential properties are subjected to emotional pricing leading to a less profit margin for the investor.
Retail and office tenants have a vested interest in paying attention to the aesthetic of their property since it is what is going to attract people to their businesses. So, they themselves would maintain and improve the aesthetics of your property.
Reliable Cash Flow
Mostly, residential leases last 11 months and you are left searching for new tenants (and the background checks) every few months. But with commercial properties, you get leases between 3-15 years allowing you to have a steady cash flow.
Despite popular belief, ‘work from home’ is not here to stay for the long run. Incompetent internet speeds, large families, limited privacy, and small houses are compelling people to go back to their offices. Over 16,000 new companies have registered since the start of lockdown as per the Central Registration Centre and most of them are all looking for new properties.
Limited Hours of Operation
Since a business would have limited hours of operation, you are less likely to get a midnight call about a plumbing situation or a lost key. Since they work when you work, you would be less alarmed to aid them with constant assistance.
So, investing in a commercial property doesn’t seem as bad after all, right? Well, now that part is sorted, let us get right to the nitty-gritty of what we are here for.
10 Factors to Keep in Mind before Investing in a Commercial Property
Here are the ten aspects that should govern your decision while investing in a commercial property.
The most pivotal aspect to bear in mind is where your commercial property is located and how economically viable that place is. Both capital appreciation and rent are determined by the location of the property.
Investing in a developing area would bore higher returns on investments than in an already developed area. Even if other factors can be compromised, the location factor should be imperative to your decision-making process.
As is with any form of investment, your budget would dictate your purchase here. Once you are sure of the location, allocate your budget towards your purchase. Put a buffer of at least 30% to what you are planning since there are always additional expenses.
This will help in narrowing down the available options of commercial businesses for you. In case you are not able to procure the entire amount of investment, there are usually options for a small down payment alongside a mortgage for the remaining amount.
Feasibility of Businesses
Thorough research on both short-term and long-term implications of the property has to be considered. This includes finding out about any and all of the upcoming projects in the locality, expenditure patterns, local buying trends, price fluctuations, etc.
The better connectivity it has to transport and the area of the concerned business, the more feasible it is.
Analyzing the lease structure can pay huge dividends in the long run. Some commercial properties are structured with a 3+3+3 or 5+5+5 years lease for a total of nine and 15 years respectively with a raise every three or five years. There are also lock-in periods where the tenant can’t vacate the property.
Try to formulate a lease structure that would be beneficial from your end. For instance, the longer the lock-in period would be, the stable your income source would be from the tenants.
Having amenities such as multiple elevators, aesthetically-pleasing lobbies, higher ceilings, high-end interior designs, green gardens, better views, tight security, and large parking space would elevate the price of your commercial properties.
Many multinational commercial tenants look for quality space and pay a premium amount for it. So, try and make sure your property comes with as many of these amenities as possible. Of course, more amenities would incur more expenditure but it is worth it since it would fetch higher income from the tenants.
Consult a good lawyer before making your purchase since they would help you in ensuring your commercial property is free of any form of litigation. That is something you don’t want to deal with later.
A tenant or buyer can re-negotiate or vacate or even take legal action against you if any litigation is found in your property. So, please ensure that there are no legal implications on your property.
Who you choose as your tenant can play a big role in increasing (or decreasing) the value of your property. Ideally, blue-chip multinational companies make for great tenants as their presence in your property heightens its value.
A good tenant would not only pay your rent in time but would also pay larger deposits and are likely to stay around for a longer period.
Hidden charges can run a hole in your pocket if you don’t put it into your consideration and allocate money for it beforehand. These charges include the money that is spent on the running and maintenance of the property.
Since they are not outright mentioned, many make the mistake of not including it in their budgetary plans and in the end, suffer for it. It is generally recommended to discuss these charges in detail while signing the contract itself.
Commercial properties are not immune from risks and losses. As such, the need for spreading out risks to minimalize them is crucial. If you invest all your money on one property, then there’s the risk of not receiving rents once your tenants vacate. Meanwhile, you would have to incur losses of taxes, maintenance fees, etc.
Therefore, diversifying your investment is recommended. Investing in multiple properties in different locations can decrease the variability in income, leading to lesser risks.
Expectations v/s Reality
Very often than none, the gap between your expectations and the reality looms large. The sooner you minimize that gap, the more prepared you would be to tackle the situations in front of you. In other words, don’t expect too much too soon when it comes to a commercial property.
Have a proper plan for financing the purchase of your property. Practice patient and keep yourself updated with the market trends. This would help you in being aware of the opportunities and you will be more prepared to rise and reap the benefits when they come.
The Arcade at Brigade Orchards – A Commercial Project for long term growth
North Bengaluru has emerged as a promising land for commercial investment in recent years and its potential is only increasing with each passing day as it grabs the attention of investors globally.
Hoping to provide a leeway for all commercial investors, Brigade Group has built The Arcade at Brigade Orchards as one of its most ambitious commercial projects. Championing the slogan of creating a ‘city within a city’, The Arcade is touted as the next big commercial investment. With high-end interiors, humongous parking space, natural light and ventilation, stepped terrace gardens, and a magnificent atrium, it has been built by keeping a zero-discharge design in mind.
Needless to say, this is an enticing investment and it is now open to both lease and sale. A world-class property in one of the prime locations – it can’t get better than this. So, make sure to make your presence be felt here before it’s too late.
Keep in mind that there is not a universal one-size-fits-all thumb of rule when it comes to investing in commercial properties. There can’t be. You need to practice flexibility and play multiple scenarios in your head before making the final call.
With higher returns, you need some research and hard work beforehand. So, to make an informed decision, consider all the aforementioned factors and then some.