10 Rules Of Commercial Real Estate Investing

10 Rules Of Commercial Real Estate Investing

Commercial Real Estate Investing is a good idea provided you do it being well-informed. Investment in commercial real estate is far better than investment in residential properties in terms of long-term gains.

It’s both profitable and challenging to do commercial real estate investing. You’ve got to gain some expertise in long-term investing because commercial real estate investing is as good as long-term investing. On one hand, there is the allure of high gains, and on the other hand, there are pitfalls. Sometimes, it’s like finding yourself between the mountain and the high sea. The last thing you would like to end up doing is falling between the stools. You’ve got to make sure your commercial grey matter is where it should be. If you find yourself in the mist, you may call in help to wipe the slate clean for you. You may go alone without assistance but you have to be on your guard. The ground out there is slippery and you may go wrong in your judgments and fall into the precipice. It will be wise of you to find a professional who can show the way. There are agents capable of handling real estate investment of clients for a fee.

commercial real estate investing is not as difficult as it is made out to be by the sceptics or the pessimists. It’s better to go by the dictates of the people in the know than following the advice of someone with a sugarcoated tongue and a glib talker. It’s a good idea to verify the background of the person who intends to guide you in your dealings. Moreover, you should follow the principles of property investment. Your learning continues while you look for commercial rental property. The ad space is splattered with commercial space for rent. You may find yourself irresolute and indecisive. It’s like finding the needle in a haystack. Get yourself equipped with the following information if you don’t want to go wrong:

  1. Location is supreme: There is nothing as important as the location of the property you are eying. You will be earning through two ways – rent and earnings through capital appreciation. These depend a lot on the location of the property. A vacancy is a premium parameter to decide on the right location. If you find the vacancy is wafer-thin, you know that the supply of property is restricted, so a tenant is least likely to vacate. That brightens your prospect of getting higher rent through periodic escalation and securing an appreciation of your capital. The tenants in other locations, where the pressure on the property is easy, may negotiate on rent and even vacate at short notice. It is true of any retail space for rent.
  2. Quality rules: The building quality makes your day. The pulse of real estate investing beats with the quality of the building. In a way, the quality is analogous to the health of a person. The quality determines the type and number of tenants you might be getting. A good quality property will make for your investment more than you can bargain for. It means higher rent, better retention of the tenant, and higher capital appreciation. You should know the MNCs are willing to pay premium rent for the premium quality, and who doesn’t want MNCs as tenants. Multinationals are willing to pay high rents for both quality and location. You must know that prestigious tenants like MNCs look for certifications from established rating agencies. They also want a building with multiple elevators, high ceiling, spacious corridors, and panoramic views.
  3. The interplay between demand and supply: It is obvious that if the supply exceeds demand, there will be a fall in the amount of rent and a spike in the dictates of the tenants. A preposterously high supply will disorient the rent or price of old and new buildings, that is a matter of concern. Every city has a niche segment where the highest quality properties are found. Even these markets have periods of highs and lows in terms of demand and supply. During the low-phase in demand, the tenants will force a renegotiation of rent and escalation clauses. The reverse also is true.
  4. Rent in situ and prevailing rent: A smart and intelligent investor will understand this complexity. In the event, the rent paid by the tenant in the building is equal to the market rate, but still relatively lower than that of another tenant in another building paying higher rent, then the tenant is not going to vacate the property even if the rent paid by him is relatively higher than his expectation. This observation is knowing how risky or safe the property is. 
  5. A good tenant makes the difference: A good tenant will add value to the property. You should look for bluechip companies with the sound balance sheet as your tenant. They will pay you much higher rent, stay much longer, and add value to the price of the property.
  6. Look for the interiors: The fit-outs in the property are of extreme importance. You know for sure that a tenant who has done the interior doups himself will love to stay much longer. So it’s better to get a property bare without any fit-outs so that the options remain open. If you do the fit-outs, you will charge the additional rent for your fitments.
  7. Bare rent and rent with interiors: You should avoid the trap of falling for a property with interior fitments and paying the extra price for that. The agents will try to baffle you with enticing remarks on how much more you will gain from a tenant due to the interiors done. Ther is a catch. Over the next few years, the value addition due to fit-outs will nullify to nothing. So, you’re not going to get additional rents for the interior fittings done permanently. It is better to be aware than to be bamboozled. A smart investor will not be hoodwinked by the charlatans.
  8. Understanding the difference between commercial and residential rent: The lease of commercial buildings is different from that of residential buildings. There is a lock-in clause which varies between a commercial space and a residential space. It is better to have a longer lock-in period. The tenant in a leased property can vacate whenever he wishes and at the same time you cannot force him to leave within the period of the lease.
  9. Security deposit is an indicator: The amount of security deposit is equal to 12 month’s rent. You should not agree for a security deposit for less than six months. If the tenant wants it, it means he has issues about his cash inflows. Some tenants will ask for a smaller deposit and shorter lock-in.
  10. You should remember the adage of “don’t put all your eggs in one basket”. It’s better to diversify your investment. You can choose a mix between the properties of different types and locations. With properties in different locations in a city, you are safe even if a tenant vacates a particular property the other rented places are there to give you revenue. When a tenant leaves, your rent inflow stops but the fixed costs remain in force.

Also read : Buyers Guide on Commercial Property

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