Investment in Commercial properties provides returns through two avenues – rent and capital appreciation.
Investing in commercial real estate may seem challenging, but it is not if you follow these simple rules:
Location: The Major Aspect
Everything depends on the location of the property. The profit of investing in commercial properties is through returns and the major role is played by the location of the project. While investing one should always look for locations where supply is great and tenants do not have second thoughts of vacating; the property should have less than 5% vacancy. This simple logic will lead to higher rents and capital appreciation.
A security deposit is any money a landlord takes from a tenant other than the advance payment of rent. In commercial properties, security deposit varies between 10-12 months’ rent. Then tenants may offer 6 months or less, which means they are looking for a short-term period and that should be avoided.
The commercial lease is structured generally as 3+3+3 or 5+5+5, which means 9-year (or 15-year) lease with 3 years (or 5 years) escalations. The investor must have knowledge about the lease structure. Moreover, it is better when the lease is longer because that is what better for the investor.
One should not invest wholly in just one project because it leads to higher risk, but diversification reduces the risk and it is true in commercial real estate. If you will invest in different projects then it reduces the property level risk.
Demand Vs Supply
This is one of the major aspects followed by savvy investors. There are different micro-markets of every city, which lets you know about the supply and demand of the property. The rents and prices would come down if the annual supply over the next 2-3 years exceeds historical demand. However, high supply can affect the new and old buildings which will lead to lesser rents because customers will be presented with so many choices.