Have you considered commercial investment properties to add to your portfolio? On a surface level, it seems like a long-term, but easy investment that will generate ongoing income and also potentially appreciate in value the longer you own it. For those who have capital to invest, is it the right type of investment for you?
Something new to consider, the pandemic has quickly changed the use of buildings significantly. Office buildings and retail shops may no longer be lucrative structures to take on. Some experts are anticipating that more workers will continue to work from home and as online shopping gains popularity, it reduces the need for brick and mortar stores. According to fool.com1 article “Commercial Real Estate Predictions for 2021”, warehouses, life sciences and data centers are thriving going into 2021 and looking for more space, despite the pandemic. So, there are opportunities available. It’s best to get your financial advisor, commercial realtor, and design/builder to work with you and identify a good opportunity.
What You Need to Know?
Prior to selecting a property and submitting a purchase agreement, you’ll want to evaluate and compare your options to make an educated decision on the best potential. Each market is different and the price of a building in the city limits will be different than one of similar size on the out skirts of town, so the most common way to compare them is the Cap Rate, also known as Capitalization Rate2. You can calculate the Cap Rate by dividing the Net Operating Income by the current market rate3. The Net Operating Incoming is based on the revenues that appear on the properties income or cash flow statement less the expenses of operating the building (i.e. maintenance, utilities).
How to Add Value to the Property
Finding a lower cost property that needs updates can help you buy low and sell high. Depending on the building grade, most commercial properties don’t require the highest quality finishes, so if you focus your updating budget to make the building more efficient with energy saving materials, automated controls and more technology, you’ll save money on operating costs and make your building more competitive. Additionally, when it comes to warehouses, life sciences and data centers, increasing the size, adding truck docks, or cold storage or heat to a building can expand your lessee potential, and add value for appreciation. Your design/builder can help you identify what types of updates should be made for good ROI.
As an added incentive, you can use the SBA 504 loan as long as you occupy 51% of an existing building purchased or 60% of a new building from the ground up. According to their website, sba.gov4, it is a requirement of the SBA 504 loan that the owner occupy part of the building they are financing, but the loan allows for purchasing more building to lease out as investment property. The SBA 504 loan offers 10% down by the purchaser, an SBA lower/fixed interest rate loan for 40% to be repaid over 20 years, and the remaining 50% is financed through a traditional bank loan.
Your Turn: Is Commercial Investment Property something that you have considered? What have you found helpful in making your decision? What kind of questions do you have? We'd like to hear from you in our comments link below. Otherwise, you could contact us at 800-WOLGAST.