Crack the Code to Commercial Real Estate Investing: Key Factors for Success

By Startup Authority August 7

Key Factors for Successful Commercial Real Estate Investing

Commercial real estate refers to the real estate that is used particularly for business or income-generating purposes. Now, commercial real estate business differs from residential real estate business because it has the potential to provide rental income as well as a capital appreciation for investors.

Now, investing in real estate can be quite profitable if you know the processes and risk factors. It has become one of the emerging businesses in the whole world. In today’s generation, you do not even need to have physical land to invest in real estate.

Online investing in real estate without owning physical land has started in India and the world. Further in this article, we will be talking about key factors for successful commercial real estate investing.

How to Decide a Commercial Property is Good or Not?

Here are some of the key factors for successful commercial real estate investing:-

Location Analysis – Is Location suitable for Commercial Property?

Location is the single most important factor behind the value of the property. The better location of your property the better you can earn investing in it. It is as simple as supply and demand.

You will want great property in high-growth areas where the demand is strong and there is a future in that place or area. There are certain things that must be kept in mind while location analysis or choosing the property location.

For example, if you buy a house in Delhi for Rs 1 crore and the usual ratio for that is Rs 25k as rent. If you have purchased a house worth Rs 2 crore then you could expect a rental income of 50k per month.

Make sure to purchase commercial real estate in tier-two and tier-three cities. This is because the rental yield for commercial properties in tier-two and tier-three cities is much better as compared to the tier-one series.

Market Research – Check Whether Commerical Property Price is Fare or not

Real estate market analysis or research is also known as comparative market analysis. It is an analysis of the current market values of properties which is comparable to a property that you are looking to buy or sell.

Proper market research is the preliminary step for every real estate investor. Before jumping into the market and exposing one must gather enough knowledge related to the field.

A real estate market analysis should be done thoroughly whether you are buying or selling the property. It is because proper market research will help you to understand the current market, the worth of properties, land rates, how much you can charge for rent, and many more.

Most real estate investors are patient enough to conduct proper market research and then proceed further with investing. If you are willing to stand out from any competitors in the market, then proper market research is very important.

Property Valuation

Commercial property is fully a number game and we are sure most of you will be doing it for investment. Make sure you value it properly and buy it at the right price. If you happen to buy the property at a high price then getting your ROI will take a longer time. Now, there are three methods of property valuation and below are them:-

Fair Market Value – This means a similar product being sold in the market and its value. You will need to check the online prices of comparable properties. If you find out the comparable price, you can easily put a 5-10% discount on the original price. You can also add or subtract a premium if any features are available in your commercial investment.
Rent Yield Method – Rent yield is nothing but, the rental returns from your commercial investment. This is calculated by the annual rent divided by the property value. Make sure to calculate the rent yield of your nearby locations. Now, to take out the property value you will need to divide annual rent by rent yield. This is how you can take out the property valuation.
Land and Building Method – This means if you have just bought the land and you are willing to construct a building after that, then what would be the value? The built-up-area cost and land cost are quite important in this method. You will need to add a profit margin as well. After calculating you will get the exact value for your property.

Financial Analysis

After you have conducted all the above factors most of your financial analysis will be done. But, that does not mean you will not conduct a proper financial analysis before investing in the real estate business. Financial analysis properly evaluates capital performance. It helps to determine the financial health and profitability of the investors.

Other than these, financial analysis is important for all investors because it can provide enormous information. It also helps the ability to meet short-term and long-term financial obligations.

Risk Assessment – Risks Involved in Commercial Real Estate Investing

The first risk analysis is the risk related to the lack of liquidity of an investment in property. One just can’t trade in and out of your interest in commercial real estate and going through the process of selling a property can often take a very long time.

Most commercial investors will take 1-2 months just to pick a broker to list the property and another 1-3 months to prepare for the marketing process and then another 2-4 months to find another qualified buyer.

The second risk is the risk related to debt financing of commercial real estate. One of the most common risks in PPMS is the risk associated with the refinancing of a property. Interest rates are also key components in sizing loans or the process lenders use to determine the total loan proceeds they are willing to issue to a borrower.

This makes changes to the interest rates very relevant during the refinance process. On the other hand, many lenders are focused on maintaining a minimum debt service cover ratio.

The third risk is the risk related to the tenants occupying the property. When a commercial tenant vacates their space that space can often sit vacant for six to twelve months or more depending on the demand on the market for that location.

To lease up a vacant commercial suite investors usually need to spend money to make that happen with leasing commissions and tenant improvement allowances incurred by the landlord.

The fourth risk is the risk related to operating expense increases at the property. If the expense increases of the property then it can significantly decrease cash flow and returns.