Five questions to ask yourself before investing in commercial property

By Gary Tasman

With Southwest Florida’s population booming and interest rates at near historic lows, our region is once again ripe for commercial development, and investors are taking notice. But for first-time buyers looking to capitalize on the commercial property market in Southwest Florida, the process of scouting properties can be intimidating.

Before you take the leap into commercial property investing, there are five questions you should ask yourself.

  1. What’s my goal?
    One of the first questions your broker will ask you is your investment strategy: Are you interested in growth or income?Investors who pursue a growth strategy are hoping to buy a property in a prime location in the hopes that they will be able to re-sell the property for a profit after the property appreciates. Often, however, these properties come with high price tags and low operating income potential, which creates a significant barrier to entry for first-time investors.The second property investment strategy focuses on income production and cash flow, also called high yield properties. In this scenario, investors seek properties with low operating costs in relation to the rental income they generate. While the monthly and annual returns on these properties can be favorable, these properties also tend to increase in value slowly, meaning an eventual sale may not generate a significant profit.
  2. What’s my risk tolerance?
    Just like any type of investing, some property investments have relatively low risk, and some are high risk ventures. A commercial building that already has tenants locked in for several years can be fairly low risk, because the income is somewhat guaranteed. On the other hand, a completely vacant building might appeal to you because it’s a clean slate. Unfortunately, you’ll take the risk that lessees may be challenging to find.Another indicator of the level of risk you’re taking on is the property’s capitalization rate, or “cap rate.” This ratio essentially represents your annual return on investment and is calculated using your investment’s net income divided by the property’s purchase price. The higher the cap rate, the higher the reward, but high cap rates also come with increased risk.Even with a comparatively high-risk investment, a strong commercial property broker can help you mitigate some of that gamble. By conducting a thorough market analysis, your broker can determine the best possible use for your property, ideal rental rates, and how to position your investment properly to get the best price possible on your timeline.
  3. How long of a commitment am I ready for?
    If you’re thinking short term and want to start earning on your investment today, your broker will likely guide you towards infill properties. Infill properties are those already in high density areas, with established infrastructure and demand generators nearby. You’ll be located in a neighborhood that customers are already visiting for their business needs, but you’ll likely pay a high price and still need to deal with the aggravation of maintenance or upkeep of an older building.If you’re in it for the “long haul,” however, your broker may guide you towards “path to growth” areas. These properties are located in an up-and-coming region that is not yet developed, or which has experienced minimal development but shows outstanding potential. A strong broker will use his or her knowledge of the local market, growth patterns, neighborhood demographics, infrastructure updates, and recent transactions to identify the ideal properties to take advantage of future development. In the short term, you may not see much income from your path-to-growth property, but with guidance from the right broker, you’ll be well-positioned for the long haul.
  4. Who are the current tenants?
    Unless you’re purchasing raw land, your commercial property investment will likely have current occupants in place. These could be the current owners, or more likely tenants who are renting one or more units in the property. Believe it or not, the quality of your tenants can often dictate the quality of your investment, and learning about the property’s tenants is an essential part of your due diligence.Obviously, the more creditworthy your tenants and their businesses are, the better position you’ll be in financially. You’ll want to review the lease terms for each of the current tenants to project future income from the property, and to develop a plan for upcoming vacancies. Your professional commercial property broker can complete a thorough analysis of your existing tenants, and guide you on decisions like rent adjustments, lease terms, improvements and modifications, as well as the types of tenants you’ll want to pursue in the future.
  5. How hands-on do I want to be?
    If you have tenants in your property, you’ll need to find a way to manage the day-to-day operations. Accounting, marketing, repairs, daily maintenance and managing your tenants can be a full-time job, depending on the size and condition of your property and the number of tenants you’ll have. If you’re not an experienced property manager, the responsibility can be overwhelming. If you live far from your investment, have other full-time obligations, or simply want to be hands-off, it’s a smart decision to hire a property manager. Fortunately, many full-service brokerages like Cushman & Wakefield | Commercial Property Southwest Florida offer property management services to take care of the daily responsibilities of ownership.

Once you’ve truthfully answered the five questions above, you’re ready to take the next step on your property investment journey: Consulting with an experienced commercial property broker. The experts at Cushman & Wakefield | Commercial Property Southwest Florida have access to best-in-class data and analytics to help you make the right decisions to meet your property investment goals. Contact us at 239-489-3600 or contact-us.

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