Things to Look for in Commercial Properties

Commercial properties indeed represent the next level for many real estate investors and it is important to know what you are looking for, before you ever embark on this pursuit yourself. In addition to considerations like price and management, many investors shy away from commercial real estate because they just don’t know what they are looking for in the first place.

In many ways, this is understandable. Most real estate investors learn the so-called tools of the trade through reading books, attending live training events, and the like. Most such training tools focus on what it takes to get started in real estate investing, and often do not include much information on commercial properties.

What new investors do learn a lot about are single family properties, since these represent the most familiar type of real estate for most consumers. Single family homes are ideally purchased below market value, are in stable areas, and produce a monthly cash flow, if they are to be good investments. Are commercial properties really that different?

I contend that they are not, and that there are more similarities than you may realize. Let’s start with the issue of market value. The true market value of any property is only a function of what a buyer is willing to pay for it, regardless of its size or intended use. Ways to estimate market value include income models, stated market prices for similar inventory, and of course recent comparable sales. Regardless of the source of a property’s value, discounting is still an important aspect of real estate investing.

Commercial real estate is prone to even deeper discounts than its single family cousins because of the size of many properties. Motivated sellers find that commercial properties become more unaffordable more quickly and the need to offer deep discounting to a buyer often becomes necessary. Add to this that there are generally fewer buyers out there looking for commercial real estate and you should see that good value is indeed out there.

Another issue to consider when looking at commercial properties is the stability of the area. Are rents consistent with those in the area? Is the property in a good part of town, where tenant turnover is not more common than normal? Is the area represented by stable employment? These kinds of considerations are very important to a commercial real estate investor because they directly affect the income and caliber of tenants that will exist for the property once it is purchased.

Last, we have the issue of cash flow, which is perhaps the most important of them all. Prices may be stellar, tenants may be good, but a lack of cash flow is a deal killer for just about any commercial property. Cash flow (or lack thereof) is sometimes forgivable with single family homes (especially if they are in good market growth areas). This same cash flow is the life blood for a commercial property and is thus an absolute must.

When you see that commercial real estate is judged by many of the same criteria as single family homes for investment, you decision to look into it further will hopefully be made easier.