Ten rules of commercial real estate investing

It is rather easy to invest in a commercial real estate project if you are looking for long term returns. There are certain instruments which one needs to keep in mind while investing are:

Location

The location for commercial properties provide returns on through two avenues of rent and capital appreciation and they heavily depend on locations. It is better if you find a place where tenants are much less likely to vacate the place, which means you get higher rents.

Quality

A tenant wants a place which is not just in a good location but with better quality than the rest. A tenant is ready to pay a better price for the property if it has some quality. To get a good rating, a building must have, more elevators, higher ceiling heights and more lobbies, which also increases the chances of the building selling much more faster.

Demand and supply

One of the first things one must look before investing in a property is to ensure that there is demand for the place and higher the demand, the better you can supply. Also, the new building can get you higher rents, and older building can get you lower rents.

Market rent vs. in-place rents

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Relatively a new concept to make sure that property they are investing is less risky. A good investor will always try to know the price of rent in the market, which will be the safest investment as the tenant is less likely to vacate.

Quality of tenant

A good tenant can increase the value of a commercial property, where they pay their rents on time, pay higher deposits and stay longer, which increases the value of a property.

Interior fit-out

It is better that you ask the tenant about the fit-out of the property. A tenant who does his own fit-outs is more likely to stay longer in the property to recover the costs.

Base rent vs. without rents

This is one of the ways developers dupe investors, where they show higher rents by including fit-out rents but fit out rents, are not permanent and are payable for a fixed period of time. As time goes by the fit-outs, returns drop.

Lease structure

Commercial leasing is much different than residential ones. There is a one-sided period where the tenant can vacate at any time, but the landlord cannot ask them to leave. There is a lock-in period where that tenant cannot vacate the property. Generally, it is better for the investors where you look for a lock-in structure as there is less risk involved.

Security deposits

Security deposits differ from commercial to a residential property. It is better to look at a tenant who is renting a property for more than 12 months as it is less risky.

Diversification

Do not invest all your savings in one property as this can expose you to a higher risk. Having an investment in multiple property will reduce variance in income and also diversify the risks.

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