Purchasing a commercial property for the first time is a daunting task that requires a great degree of planning and consideration. Investing in commercial real estate can deliver attractive returns for investors, but also comes with a great deal of risk. With this in mind, there are a number of important factors to consider when investing in commercial real estate.This article will provide some useful tips for first time commercial property investors.
Identify your Investment Goals and Strategy:
Prior to investing in any property it is important to have a clear understanding of your investment goals and how you intend to achieve them. Some important factors to consider when coming up with an investment strategy include:
- Investment Horizon: How long do you intend to hold the property for. Are you looking for a stable, long term investment or a short term investment offering a quick return.
- Investment Value: How much are you willing to invest in your property? There are a number of “hidden costs” associated with owning a property, it is important that you factor these into your investment strategy.
- Risk Appetite: Some property types may offer a greater return, but often come at a greater risk to the investor. It is important to understand your risk appetite and how it affects your investment goals.
Understand the Market:
Given the complexities of the real estate market, there are a number of important factors to consider when purchasing a commercial property. Conducting a market analysis will help you to understand the external factors influencing the property market which will be key to the success of your investment. Trends such as property prices, rental rates and property supply will help give you an idea of the potential returns you can expect from your investment. Moreover, an in-depth analysis of the property’s location will allow you to understand the local demand and supply for commercial space.
Assess the Property:
Once you have located a suitable property it is important that you do a thorough analysis of the property and how it helps you achieve your goals. There are a number of different metrics you can use to assess the financial health of your investment:
Internal Rate of Return (IRR): The IRR is commonly used to estimate the profitability of an investment.
Net Present Value (NPV): This is the present value of all the property’s cash flows and is a useful figure to compare investments.
Return on Investment (ROI): The ROI is the profit earned on the property compared to the amount that you have invested in the property.
In addition to these financial metrics, investors should also consider the other factors affecting the property, such as zoning laws, environmental regulations and building restrictions.
Consult a Team of Professionals:
Having a team of skilled professionals on your side can help reduce your exposure to risk throughout the life of your property investment:
Solicitor: Solicitors can assist in all things legal ensuring that you are fully informed of the implications of your decisions. In addition to this, they can assist in drafting leases and purchase agreements.
Property Manager: A property manager can help you understand the potential issues you might encounter in the management of the property. Property managers are able to leverage their experience to ensure that the building is operating as efficiently and effectively as possible.
Independent Mortgage Broker: Independent mortgage brokers are able to offer their clients unbiased advice on their funding options.
Secure Finance for your Property Investment:
Securing the right funding is an important determinant in the success of a commercial property investment. The cost of finance can have a substantial impact on the projected return of your investment. With this in mind, consulting your independent mortgage broker is an important step in your first commercial property investment. There are a number of ways in which an independent mortgage broker can assist you:
Lender Network: Mortgage brokers have an extensive network of lenders, these include banks, building societies and other financial institutions. Commercial mortgage brokers are able to leverage this network or lenders in order to ensure that their clients have access to the best products and most competitive interest rates.
Industry Knowledge: Commercial mortgage brokers possess an in-depth knowledge of the lending industry, often as a result of years of experience. This knowledge enables brokers to protect their client’s interests and ensure they are making fully-informed decisions.
Efficiency and Effectiveness: Commercial mortgage brokers act as an intermediary between lender and borrower. This position allows them to increase the efficiency of the underwriting process and ensure a timely completion.
Commercial mortgage brokers, like solicitors, are able to advise their clients throughout the lending process, from application to completion. Having a mortgage broker on your side will enable you to make fully informed decisions with regards to your project’s funding. In addition to this, given the size and complexity of the lending market, a mortgage broker can help you to locate the right product for your funding requirements.