Commercial property

Investing in Commercial Real Estate – Ridge Times

Commercial real estate has always been viewed as a good investment because the value of the asset always increases over a long period of time, whether the market is going up or down or trends change.

In the past, most investors in commercial real estate were institutions such as insurance companies and listed companies. However, in recent years, more and more private investors have seen opportunities to develop their real estate portfolio. As a result, many have taken the plunge as sole buyers, while others have acquired commercial assets in cooperative societies or groups.

Residential vs commercial

Investing in commercial property is not the same as buying a house or even a residential investment property. This is a purely business decision, and when considering any commercial real estate investment there are several factors to consider before committing.

  • Income risk tends to be lower in commercial properties and leases are generally longer, which helps stabilize cash flow.
  • If you need financing, keep in mind that most banks will not finance more than 75% of the purchase price of a commercial property. This means that you will need a down payment of at least 25% of the purchase price, which is significantly higher than what is required for a home loan.
  • Loan repayment terms are also significantly shorter than for home loans. Most banks require mortgages on commercial property to be fully repaid within five to seven years, compared to 20 to 30 years for home loans.

Return on investment

In the long run, well-chosen commercial properties can offer higher returns than residential properties. The first step is to decide on the type of property you want to own.

According to the ETF Survey of Commercial Real Estate Brokers for the third quarter of 2021, industrial and warehouse real estate brokers reported the highest level of activity. The retail activity rating also strengthened for the fifth consecutive quarter, as offices have the lowest rating of the three main sectors of commercial real estate.

Whichever category of commercial property you choose, you must perform a rigorous due diligence exercise to establish the property’s assets and assess its commercial potential.

Site

To ensure the success of your investment, it must be tailored to the needs of the tenants you want to attract.

Check with Town Planning to make sure there aren’t any significant changes to the store, such as nearby landscaping projects, that could affect your buying decision.

Be aware of overlap zones, which supersede the usual zoning bylaws. An overlay zone is a category of zoning that applies to a piece of land or a unit of land in addition to the base zoning. It provides for additional development parameters or user rights which may be more or less restrictive than the basic zoning. It may also include planning provisions and parameters relating to environmental protection.

Find out if there are any environmental issues, such as extreme air pollution or declaring the area as a reserve for the protection of a particular creature or plant. Decide if this could negatively affect your ability to rent the premises.

Ask the following questions:

  • What are the circulation patterns in the region?
  • Is the property highly visible from major highways in the area?
  • Is there sufficient foot traffic for future tenants, whose success may depend on it?
  • Is the area safe for customers and employees traveling to and from the property?
  • Will tenants’ employees have easy access to the premises?
  • Is there adequate public transportation in the area for staff and clients?
  • Does the establishment have sufficient parking?
  • If your tenants are causing noise, pollution or traffic jams, can this lead to complaints from neighboring businesses or properties?

Risk

Before investing in commercial real estate, you should assess all possible risk factors.

  • In a building with only one tenant, you could live several months without rental income if the tenant does not renew the contract at the end of the rental period. You will still have to honor your deposit as well as pay the rates and municipal services.
  • With multiple tenants in an assortment of businesses, you should be reasonably sure that only one or two units will become vacant at the same time.
  • Ideally, you should set aside sufficient funds to cover the occasional vacation as well as upkeep.
  • Diversifying your investments will help you weather most economic downturns.

Be patient

While investing in commercial real estate may seem daunting to a novice, the obstacles are not insurmountable. With a reliable commercial real estate broker to guide you in your selection, the experience can be extremely rewarding.

Before investing, however, it is advisable to be patient and wait until the right property is available.