It’s easy to understand the attraction of investing in commercial real estate, especially in Arizona, where the Valley is seeing a major boom in the opening of restaurants, retail spaces and large, posh apartment complexes. The potential returns on commercial property can be much bigger than investing in residential real estate, but so are the potential losses. Investing in commercial real estate also requires a lot more capital, either from you or from other investment sources. Because commercial tenants typically stay much longer than residential tenants, that can also translate into longer vacancies. Making a smart investment means meticulously weighing the risks and rewards and determining whether an investment opportunity fits with your goals. Let’s look at 4 questions you should ask before investing in commercial real estate.
1. Is there sustained demand?
When investing in commercial real estate, the number one question you need answered is if there is a sustained demand for the demographic tenancy. For example, if the property being considered is an apartment building in downtown Phoenix, there may be an immediate demand, but what about ten years from now? What is happening in that area that will sustain the demand for renters in that apartment building? Downtown Phoenix has seen all three state universities expand their campuses into the area. A lively arts scene and influx of restaurants, retail stores and ancillary businesses have significantly changed the landscape. Is the investment property geared toward students or young urban professionals? Would one demographic be a better guarantor of sustained demand than another? All these factors must be considered when determining whether a potential commercial investment will experience sustained demand.
2. Is it a good location?
Get to know the area in which you might potentially invest. That means finding out if the area is appreciating or depreciating, walking the entire property in the day. Visit the property at different times, during the day and then again at night. Check it out on Friday and Saturday evening. Explore the surrounding neighborhood. Ask yourself if this is a property that would attract your investment 10 years from now, just as much as it does today? Will the property attract a high tenancy rate?
3. Do the guarantees make sense?
You are obviously considering investing in this property because you have been guaranteed a certain amount of income. Does this guarantee make sense? Only due diligence will answer this question. Compare similar properties, look at rental demands for such a property in a specific location. Get a detailed financial analysis of the property; one that lays out:
• Net income
• Expected return
• Cash flow
• Accrual of equity
• Property taxes
• Cash on cash returns
• Variety of leases available
You should also ask for the seller’s last two years of “Schedule E” or partnership corporation return for the property. This will provide an accurate reading on the performance of a company.
4. Is your broker experienced?
Work only with an experienced broker who understands investing in commercial real estate and the nature of commercial buildings and properties. More importantly, hire a broker who is intimately knowledgeable about the location in which you are considering investing. It is crucial that your broker really knows the area in which you may tie up a considerable sum of money.
There are, of course, other considerations to take in before investing in commercial real estate. However, answering these five questions lays the foundation for entering an in-vesting scenario with the knowledge you need to protect your interests and meet your financial goals.
At Landmark Title Agency we work with builders, developers, brokers, attorneys and investors, providing our expertise in commercial services in Arizona and across the U.S. To speak with one of our Escrow or Title Officers call (602)748-2800 or visit our website at ltaz.com.