How to Invest in Commercial Real Estate – Risk Analysis
Are you considering a commercial real estate loan for a commercial real estate investment? The first thing to decide is whether you are looking for a safer investment (and lower return) or a riskier investment (potentially higher return). If you are a first time or novice investor with limited experience, you should consider the former – a safer, less risky investment. If you are an experienced commercial real estate investor, with a solid understanding of commercial real estate, you might be in a position to consider a riskier investment.
What makes some investments safe and some risky? The basic answer is property type, occupancy, and location. Let’s consider each in turn. First, we will discuss property type. A multi-tenant, multi-use building is typically less risky than a single tenant special use property. As an example, an apartment building with many diverse tenants is a pretty safe investment because if one tenant moves out, there is usually someone else ready to move in. Apartment vacancy these days is at all-time lows. Contrast this to a single tenant property such as a bowling alley. If the bowling alley operator can’t pay his rent and vacates the property, how long will it take to find a new tenant? How much money must the landlord spend repositioning this type of commercial real estate for a new occupant? The potential for vacancy and lost rent is very high. Next, we consider current occupancy. A good building with high occupancy performs better than a weak building with low occupancy. The weaker building will probably need improvements or renovations in order to compete in the market. An experienced commercial real estate buyer might prefer to take an older building that needs work and renovate the building in order to increase occupancy and rents. Last, we consider property location. The location is always key when discussing commercial real estate. Is the subject location in demand? Is it near transportation and employment? Is the area stable, up and coming, or past its prime? Are people moving into the area or is the area losing popularity? Understanding the location is key to succeeding with your commercial real estate investment.
Before investing in commercial real estate, it is important to understand your risk tolerance level by analyzing the properly thoroughly upfront. Your choice of investment should match your experience level, appetite for risk and expected return on investment.
You can check out our commercial real estate loan rates here. Then use our commercial mortgage calculator to determine your monthly principal and interest payment.
If you would like to discuss a particular investment in greater detail, please call me 516-596-8537. Good luck investing!