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Investing in Commercial Properties 101

Residential properties may still be the real estate investment of choice – but commercial properties are far more financially rewarding.

Income from the use of retail, office, storage, industrial, and mixed-use development properties (a combination of residential, retail, and office spaces) are highly lucrative.

Before you take the plunge in this type of investment, it’s important to consider the following factors.

  • Economic growth
    The area’s economic growth plays a big role in the outcome of your investment. Fast economic growth means higher demand for commercial properties that house businesses or office spaces. Slow, or zero economic growth, on the other hand, could bring huge financial losses. Timing is just as crucial. So keep a close eye on the area’s economic activities and make sure you buy property when growth is about to peak, or when it hits maximum level.
  • Location
    Investing in property that is difficult to access, is far from commercial centers, and provides more issues than opportunities for investment, is useless. Of course, this depends on what the property will be used for. As a rule of thumb, office and retail spaces thrive on proximity, while regulation puts industrial properties at the other end of the spectrum. Accessibility, however, remains a key in determining an industrial property’s profitability.
  • Management style
    It’s not enough to shell out money. You need a strong management style. You can invest in funds intended for actual physical property, try indirect investment in funds exposed to development corporations or real estate firms, or purchase the property yourself. It is important to be aware of the risks and benefits involved when choosing the right management approach.

As in all ventures, investing in property entails risk. It is important for those who want to buy or invest in commercial properties to know the following things:

  • Lease term
    The longer the lease, the better. A 3 to 5-year lease is very good, but it takes time to find tenants willing to lease for such a long time. Prolonged vacancies are common and investors should be prepared for this.
  • Supply and demand
    The presence of many commercial properties in a given area is a boon and a bane. It’s a boon because it means more opportunities for investors. But it could be a bane because competition is stiffer. The investor or owner can incur loss of potential income when tenants opt to lease a competing commercial property.
  • Infrastructure changes
    Changing times demand upgrades in facilities such as elevators and security services. This means cost on the investor’s part. However, these are necessary to maintain and attract new tenants.

A slowly stabilizing market means better opportunities for investing in commercial properties. But one needs to anticipate and understand inherent risks to be successful.