Making an income in real estate isn’t limited to private properties. Investors can also see profits from their commercial investments if they know how to approach the process.
A commercial property might refer to any of the following:
- retail buildings
- office buildings
- apartment buildings
- “mixed use” buildings
- industrial buildings
There are many benefits to purchasing a commercial property – most striking is the increased earning potential. Commercial properties can get as much as 12 percent of the purchase price in annual returns. Private residences typically only see a four percent annual return.
But high returns don’t happen right away. They take hard work and a thorough understanding of how to make the most of an investment. Therefore, it’s important to take some proper steps so you can see some real income from your commercial real estate.
1. Find a Solid Property
Much of the success of your property depends on the initial deal made. It’s easy to be duped when you overpay for a property or miss damages that mean costly repairs. Commercial buildings have unique plumbing problems, for example, that can cost thousands to fix. Problems with electrical work, the foundation, mold, the roof, and other major fixes can also lead to lost money that can’t be made up with your annual returns.
When searching for the right property, always have a qualified home inspector accompany you. They’ll search for signs of serious damage and provide you with cost estimates. This can either help you avoid a bad property or be used in negotiations to get a better deal.
2. Maintain the Property
Commercial buildings amass a lot more wear and tear than residences. You can significantly extend the life of your property if you properly maintain it. It’s always a good idea to hire property managers who will have a list of maintenance companies on hand. They’ll orchestrate routine checks and appointments for repairs. This takes a lot of stress off your plate.
If, however, you don’t feel like property managers are in the budget, make sure you have a set of great repair companies on hand. If you have a plumbing or electrical problem, they can be on the scene quickly to reverse the damage and keep you from losing tenants.
3. Understand the Commercial Property Market
The commercial property market is very different from the residential property market, yet there are some similarities. Here, the success of a commercial income property is wholly dependent on the state of the local economy. If businesses are shutting down, unemployment is rising, and the population is slowly decreasing, it’s a sign that the local economy can’t support another business or large apartment complex. If this is the case in an area you’re considering, it’s best to look elsewhere.
4. Charge the Right Rent Prices
Learning the market will also help you charge appropriate rent prices. Properties priced too high will keep your units vacant, and those priced too low will either make the property appear cheap or have you losing out on profits.
The best way to know what rent to charge is to assess similar properties in your area. Rent prices are extremely competitive, so the price of a property with the same square footage and amenities should be very close to what you charge.
5. Sell When Appropriate
Many investors keep their commercial properties for years, collecting the rent and ensuring a long-lasting annual return. Others like to buy and sell, making a quicker profit based on market fluctuations. This process takes a very thorough understanding of how the market changes.
You’ll want to spend a lot of time watching the market, finding an economy that’s on an upward spiral. As prices rise, you can sell the property for immediate profit. The selling of a property usually occurs within five years of the initial purchase, and it can be a risky business depending on the market.
If you’re venturing into commercial real estate, you have an exciting adventure ahead of you with the potential for wealth. But don’t be deceived by the profits alone. There is much to be done to achieve a profitable property, and going into the market unprepared will leave you penniless rather than rich.