6 Factors To Look While Investing In A Commercial Property In 20235 Apr, 2022
Investing in a Commercial property has become increasingly popular among investors seeking to diversify their portfolios and generate passive income. Preleased Commercial Real estate investments are an attractive idea for investors, especially the ones with a sizable sum of money to invest. It enables investors to not only enjoy appreciation of the asset but also a stable rental yield. Based on the location of the asset, the stature of its tenants and multi-year agreements with lock-in clauses, a commercial real estate investment can yield decent returns.
However, investing in a commercial property requires you to spend a considerable amount of time before you invest as you must factor in various things. Here’s a quick list: -
Factors To Consider Before Getting Into Commercial Real Estate Investment
Before getting into Commercial real estate investment, it is essential to consider factors such as property location, market trends, the condition of the building(s), zoning laws and regulations, leasing agreements, and potential rental income.
Market Potential of the commercial real estate property
If you are considering a commercial real estate property for investment, you must first understand the potential of the market and the ecosystem. If the city, the area, etc. is a buzzing business hub and always in demand with global multinationals or reputed local companies, it may be considered for investment.
The reason being that such tenants are unlikely to default on their rentals and are the best bets for a multi-year deal with lock-in agreements. One must also conduct enough due diligence on the identified asset and check if there are any legal issues, history of conflict between tenant and owners, the ratio of occupancy, any rent defaults, etc. as every little piece of information on the commercial real estate property allows one to make the right investment decision.
Nature of the tenant’s Business
You must know the nature of the tenant’s business over a period. You may also want to know the inherent risks in such models.
For example: If the tenants run businesses that might be disrupted soon due to online businesses, it may not be too wise to consider the same as it could have a serious impact on the rental yield of your pre leased commercial property.
Management of the tenant’s businesses
It may be wise to know more about the tenants and the management. If the tenants are companies known for good governance and top-quality management team, it might be a good idea to consider commercial real estate property that hosts such companies.
Know the permissions required and the time taken to get them
A commercial real estate asset may need permissions and clearances from multiple administrative authorities of the city before you can make an investment. It would be prudent to understand or even create a list of all such permissions or approvals and build a tentative list of the same with an approximate duration of time taken for such permissions. Once that is done, it can give you a fair idea to gauge if you have the time and patience to make such an investment.
Understanding key working and employment trends
Let’s imagine that the commercial real estate investment opportunity that you are considering hosts technology firms or e-commerce firms which may not necessarily need such office space and may adopt remote or hybrid work models eventually.
You must factor in such risks while considering a commercial property investment. One must figure out an ideal mix of tenants as technology companies are known to be stronger on cash flows and reserves and are hence less likely to default on payments. On the other hand, there is always a risk of continuity as they may go hybrid or even start operating out of tier 2 and tier 3 cities as a cost-effective measure to host themselves closer to the human capital in such cities.
Look for creditworthy partners
Commercial property investment comes with a significant upfront initial investment. You must look for trusted sources of capital and partners with good pedigree and reputation. They enable you to make a great investment by bringing in the finances. However, what’s more precious is their experience, intelligence, and business acumen.
Why should an individual investor look into Pre leased Commercial Property?
One might think that commercial real estate investing is way beyond reach just because it requires substantial due diligence, large capital investment, market analysis, etc. That's where Fractional Ownership of pre leased commercial property comes in and makes this asset class accessible for the individual investor.
Fractional ownership allows investors to pool their resources together to purchase a pre leased commercial property, which in turn reduces the burden of large capital investments on individual investors. Furthermore, fractional ownership also offers investors a chance to diversify their portfolios by investing in different asset classes and properties.
What’s Fractional Ownership?
Fractional Ownership enables you to invest in commercial real estate property using a relatively smaller sum of money and buying a small part or ‘fraction’ of the desired commercial real estate. For an investment of as low as INR 25 Lakhs (that’s lesser than the cost of a one-bedroom house in Mumbai), you could own a fraction of a grade-A premium preleased commercial real estate.
- Fractional ownership also allows investors to take advantage of property management companies' services, saving them the hassle of managing their properties. While commercial real estate investing can be a lucrative opportunity, it is important to approach it with caution and thorough research.
Easiest Way To Start Commercial Real Estate Investing
- All you need to do is bring in your investment. The 6 factors mentioned above will be worked on by a Fractional Ownership Platform like hBits.
- hBits can guide you by offering all the information you need including market research and due diligence, for you to take an informed decision.
- Once you invest, there are no further hassles. The platform will manage the formalities, documentation, rent collection, maintenance, and all other administrative tasks while taking care of its upkeep. They will ensure that you get your monthly rental credit on time and as projected.
- In case you want to sell your fraction of the commercial property then the platform also takes care of that by ensuring you get a fair price considering capital appreciation over time.
- You do not even have to scout for tenants, work on agreements or documentation with respect to the commercial real estate property and tenant onboarding, and so on.
Fractional ownership in grade A Commercial Real Estate is one of the best ways to invest in quality real estate and let your money grow. It is one of the few avenues where you enjoy the returns while the entire work, management of your funds, etc. is taken care of by the Fractional Ownership Platform. With real-time dashboards, they can also assure transparency of the highest order. All you need to do is log in to a web-based interface and you will be able to check the estimated returns at any given point in time.
Isn’t that a great way to start investing in a commercial property? Why delay, just click here to get going .
6 Factors to Consider When Investing in Commercial Property
Commercial real estate is an attractive option for investors who want to diversify their portfolio and generate passive income. However, investing in commercial property is not as simple as buying a residential property. There are many factors that can affect the profitability and risk of a commercial real estate investment. Here are six of them:
Location is one of the most important factors to consider when investing in commercial property. A good location can attract more tenants, customers, and business opportunities, as well as increase the value of the property over time. Some of the aspects to look for in a location are:
- Infrastructure and socio-economic climate of the Micro market: The presence of other business establishments and amenities like schools and hospitals
- The connectivity and accessibility of the area by public transport and roads
- The vacancy and occupancy rates of the building and surrounding properties
- The demand and supply of commercial space in the area
- The growth potential and future development plans of the area
2. Valuation and Purchase Price (PSF)
Valuation is the process of estimating the market value of a commercial property based on various factors such as location, size, condition, income potential, and market trends. Valuation is important for determining the purchase price, financing options, tax implications, and return on investment of a commercial property. Some of the methods used for valuing commercial property are:
- Income approach: This method calculates the value of a property based on its expected income stream from rents, leases, or other sources.
- Sales comparison approach: This method compares the value of a property with similar properties that have been sold recently in the same area.
- Cost approach: This method estimates the value of a property based on its replacement cost, which is the amount it would cost to build or acquire a similar property.
After determining the market value of a real estate asset, investors should aim to only purchase at a price at or below the market value of the asset, on a per square foot basis, to ensure they are not overpaying for the asset.
3. Building Quality
Building quality refers to the physical condition, design, functionality, and maintenance of a commercial property. Building quality can affect the attractiveness, usability, and safety of a property for tenants and customers, as well as the operational costs and depreciation of a property for owners. Some of the factors to consider when assessing building quality are:
- The age and structure of the building
- The quality and durability of the materials and finishes used
- The layout and configuration of the space
- The availability and efficiency of utilities and services such as water, electricity, heating, ventilation, air conditioning, internet, etc.
- The compliance with building codes, standards, and regulations
Buildings are usually assigned Grades based on the quality of the asset. As far as possible, investors must look out for high quality, Grade A assets, to ensure least maintenance and compliance risk
4. Lease Structure, Tenure and Lock In Period
Lease structure, tenure, and lock in period of the tenant, are crucial factors that determine the income potential and risk of a commercial property. Lease structure refers to the terms and conditions of the agreement between the owner and the tenant of a commercial space, such as rent amount, duration, renewal options, escalation clauses, maintenance responsibilities, etc. Lease tenure is how long the tenant has signed the lease for to occupy the space. Lock in period refers to how long the tenant is legally obligated to occupy the space and pay rent.
The longer the lease period and lock in period, the less risky the asset from an investment perspective, as there is assurity of steady rentals for a longer period of time.
Some of the aspects to look for in lease structure are:
- The rent amount and frequency
- The rent escalation clauses and adjustments
- The security deposit and guarantees
- The Property tax and common area maintenance payment requirements and responsibilities
Tenant quality refers to the creditworthiness, reputation, stability, and profitability of the tenant occupying the space. When an asset is leased out to a large corporate entity, like a listed company or MNC, the inherent risk associated with non-payment of rent, called rental default, considerably lower and almost negligible, making the asset a lot more attractive as an option for investment Some of the aspects to look for in tenant quality are:
- The tenant’s financial statements and credit history
- The tenant’s business model and industry
- The tenant’s market share and competitive advantage
6. Zoning Regulations
Zoning regulations are rules that govern how land can be used and developed in a certain area. Zoning regulations can affect the type, size, height, density, and use of buildings and structures, as well as the parking, landscaping, signage, and other aspects of a commercial property. Zoning regulations can also change over time due to planning policies, market demands, or public interests. Some of the aspects to consider when checking zoning regulations are:
- The current zoning classification and permitted uses of the property
- The future zoning plans and potential rezoning of the area
- The zoning variances and exceptions that may apply to the property
- The zoning restrictions and requirements that may affect the development or renovation of the property
Investing in commercial property can be a rewarding venture if done right. However, it requires careful research and analysis of various factors that can influence the performance and value of a commercial property. By considering these six factors, investors can make informed and strategic decisions that can help them achieve their investment goals.
Frequently Asked Questions
Q1. What type of commercial property investment is most profitable?
Ans. Investing in commercial property can be incredibly profitable, with location, market trends, and property conditions being key factors to consider. Prime office buildings, multi-family residences, and busy retail spaces are among the most lucrative options.
Q2. Is commercial property investment profitable?
Ans. Investing in a commercial real estate can be incredibly profitable if investors conduct thorough research and consider important factors such as location, market trends, property condition, leasing agreements and potential rental income.
Q3. Where is the best place in India for investing in a commercial property?
Ans. There is no one-size-fits-all answer to this question as the Indian commercial real estate market varies widely by region and city. However, some of the top cities for commercial property investment in India include Mumbai, Delhi/NCR, Bangalore and Hyderabad.
Q4. What is a good ROI for commercial real estate?
Ans. For commercial properties, a reasonable return on investment is between 5% and 12%. Although this is an average amount, a "good" return depends on factors like the type of property and the regional market.
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