Is this A Good Time to Invest in Commercial Real Estate?

In today’s tumultuous investment world it’s very confusing, with all the conflicting information available, to decide where it’s safe to invest money and what to avoid.

Commercial real estate offers investors a diversified investment in a tangible asset which has been steadily climbing in price since the 2009 economic crisis we experienced here in the U.S. Prices should continue to appreciate as the economy improves and demand increases, as long as interest rates continue to stay low.

Depending upon the type of commercial real estate you’re interested in, i.e. retail, industrial, office or multi-family, there are various factors that need to be decided before you invest. For example, are you willing to take a more “hands on” approach, and if so, how much “hands on” work are you willing to do? Obviously, this will depend upon your experience with: tenants; leases; accounting; property maintenance, etc. Also, it is imperative you have a due diligence process plan that will help you determine if the investment is, in fact, what you’re looking for and what the problems or potential pitfalls it may have. Sometimes the best deals are the ones you don’t do.

If you’re going to be an owner/user of the property, either for all of it or a portion, then you may be able to qualify for a Small Business Administration (SBA) Loan which will allow you to get in for as little as 10% down at, incredibly low interest rates. These loans are at some of the lowest rates seen in decades and are actually some of the easiest loans to qualify for in today’s difficult lending market. Lenders are eager to make these types of loans since they are government guaranteed. The one caveat is that you must occupy at 51% of the property to qualify for this type of loan. You may take up to one year to take the required amount of space needed to qualify.

It can make a tremendous amount of sense if you’re willing to be a property owner and tired of paying rent to help your landlord pay for their property. In the 30+ years I’ve been involved in the commercial real estate business, one of the most common remarks I’ve heard from owner/users is: “One of the best things I ever did was buy this property to run my business from. It ended being worth more than the business I’ve had all these years.”

Many business owners have benefited from owning their own building and realized the plusses of it; tax benefits such as depreciation, interest write off; controlling one’s own destiny when it comes to knowing what your rent is going to be in the years to come, and appreciation. Many owners will decide to hang onto the property after they left or sold their business and lease it out as rental property to supplement their retirement. For many owner/users it becomes their main source of retirement income.

If you believe that you may be able to benefit from owning your own commercial property for your business, the best thing to do is have an experienced commercial real estate broker do a financial analysis, i.e. lease vs. buy comparison, to see if the numbers make sense for you. You’ll also need to decide if it fits into your overall business plan and if you have the capital to invest. A few of the questions you should consider are:

  1. How much will my business be growing in the next few years?
  2. Do I plan on staying in the general area or moving out in the near future?
  3. What is the general forecast for the industry I’m in?
  4. Can I qualify for an SBA loan?
  5. What is the optimal size property for me at this time?
  6. How much space will I need to grow into for the foreseeable future?

There are plenty of other issues and questions that need to be addressed and answered before making the decision to move forward in buying a building for your business. This is where a well structured due diligence plan will help you determine if it’s right to move forward with a purchase or not. You want to know what the issues are before you buy, not after.

Whether you are an owner/user or investor, commercial real estate can be a great way to diversify your investments. The commercial real estate market has been hit hard and has been bouncing along the bottom for some time during the economic downturn, but the recent improvement in values over the last 6-10 months has shown that the market is starting to get better. Now would be a good time to invest as values are on an upward trend and interest rates are at all time lows.

To learn more about how to purchase commercial real estate please purchase my book at “The Due Diligence Handbook for Commercial Real Estate”. It has many more tips on how to evaluate, create value, cut expenses and investigate properties so that you can make an intelligent and informed decision while looking to invest in income properties.

Brian HennesseyComment