Purchasing a commercial property can be an intimidating process, particularly if it’s your first time investing in commercial real estate. After all, making the wrong decisions could mean losing a significant amount of capital and suffering a slow or completely insufficient return. In a worst-case scenario, you’ll be unable to continue paying for the cost of maintaining the building and might wind up foreclosing. So, there is a real risk of losing a lot of money if you’re not careful about which property you purchase and how that property is renovated and managed. That being said, here are the four considerations you’ll want to make before buying the property to set yourself up for success:
On your first visit to the property, take a good long look at the exterior from every angle and jot down a list of every eyesore and problem that you see, along with the potential solutions. This way you’ll have a complete agenda for getting the exterior up-to-par. It’s important to calculate whether you can afford to cover the cost of the down-payment on the property, as well as the cost of installing extravagant features like landscaping stone, walkways, lawns, bushes, and other components that will be required to give the property a 5-star look from the street.
Once you’ve calculated the cost of getting the outside looking great, then you can make a similar list while you tour the inside. Be sure to refer to a comprehensive checklist of things to inspect and questions to ask the agent who provides the site tour. Investing in commercial real estate on a tight budget is never a good idea, as the expenses of interior and exterior renovation often compound and leave business owners with much less remaining capital than they had envisioned. Maintaining cash flow and having enough left over to purchase key equipment and assets is important for every commercial business. So, if your goal is to buy a fixer up commercial property, a solid rule of thumb is to expect to pay 50 to 100 percent of the cost of the property itself on renovations.
Of course, return-on-investment (ROI) means everything to an investor. So, before you even entertain the idea of purchasing a property, it’s essential that you calculate a realistic ROI projection for the amount of revenue that the property is capable of generating on a bare minimum average. It’s also wise to calculate how much the property will cost to maintain on a monthly basis, and then pose the question of whether or not you’ll be able to reliably generate revenue amounts exceeding 2-3 times of the cost of ongoing property maintenance.
Of course, one final consideration to make before making an offer on a commercial property is the value of the properties in the surrounding community. This is actually the final deal-maker or deal-breaker that every investor should check because even a great deal isn’t a great deal if the property is located in the middle of a low-value market.
Overall, handling all the above steps shouldn’t take more than a few hours on a productive business day. Thus, it’s best to make the above shortlist a brief overall guideline to follow when comparing prospective commercial properties.