Keys for Investing in Commercial Real Estate
Throughout Canada, real estate prices plummeted in the wake of the real estate collapse of 2008 and 2009. While prices have started to rebound a bit in 2014 and the first part of 2015, they still sit well below their 2007 values, which means that there are a number of investment opportunities out there for someone with the savvy and resources to take advantage of the dips that remain in the market. For example, even when the credit crisis of 2008 was at its worst, when Marcus & Millichap Real Estate Investment Services surveyed over 1,000 commercial real estate investors, 51 percent planned to increase their commercial holdings. The downturn in 2008 and 2009 was very real, but downturns are part of cycles, and investors with the patience to take advantage of an entire cycle get the benefit of increases in values as well — particularly if they buy in when prices are low.
Not all commercial real estate deals are the same, of course. Frequently, the first deal that pops up turns out to be readily available for a reason, as the property is a dud, or the property is beautiful but it’s located right next to a water treatment facility. Take a look at some of these tips that the pros in commercial real estate use to their advantage.
1. Learn to think like an expert.
You might never have invested in commercial real estate before, but that doesn’t mean that you can’t develop the mental habits to think like one. A key difference between residential and commercial real estate is that commercial properties are valued on the basis of their usable square footage. Commercial real estate brings in a larger cash flow than residential does because less space goes to waste. This is why multi-unit properties bring in more cash than single-family dwellings, and why commercial properties bring in even more. If you own a retail center, you have more tenants (and more value) per square foot. Fixed items like utility connections, restrooms and other amenities that take up more space per person in a home take up less proportional room in a commercial space. Also, commercial leases tend to last longer than residential ones, which means that your cash flow is secure for a longer period of time. Finally, remember that you need 30 percent down in many cases before a commercial lender will approve a loan.
2. Establish your limits.
Before you get caught up in the emotional excitement of a lucrative deal, have some facts in hand. What is the most that you can afford to join in the deal? What is the realistic profit you expect to bring in as a result? Who are the most important people in the deal? What is the existing occupation rate? How many empty spaces are there in the commercial property? These are all questions that influence the profitability — and advisability — of the deal.
3. Know a good deal from a dud.
The most savvy commercial real estate investors can walk into a building and determine whether the deal makes sense or not. Remember that you should always reserve the right to walk away from a deal that stops making sense. If you have a gorgeous building in a prime location, but the inspection reveals key structural flaws in the building, it’s time to start looking for a different opportunity. Look around for the sort of damage that is going to require significant repairs; in a commercial space this would include things like ceiling tiles that have turned brown with moisture; cracks around door and window frames or along walls, signifying foundation trouble that will run into five or six figures to fix; soft areas in the floor, even in out-of-the-way spaces like closets or employee restrooms. Keep that calculator on hand so that you can easily determine whether a property fits within your financial parameters or not.
4. Find the right broker.
Canada is filled with brokers looking to make a commission from connecting commercial real estate investors with opportunities. However, a lot of these brokers live hundreds or thousands of miles from the opportunities they represent, and they don’t have a significant relationship with lenders in the area or with realtors who can help you find the right property. Amansad Financial is based in western Canada and has relationships with lenders and realtors all over this part of the country to give you expert advice about the places where you want to invest. A lot of the competition uses tools like the city-data.com to spout information your way; Amansad Financial has the expertise and relationships to get you the best deal throughout Alberta, BC and the rest of western Canada.