Investing in commercial real estate is a big decision. And whether you’re new to investing or have a large portfolio of properties, focusing on strategies to maximize your return on investment is an important part of the investing process.
Here are just a few ways that you can maximize your commercial real estate investment:
1. Analyze comparables and neighborhood data before purchasing
Your due diligence as a commercial real estate investor is vital to your success and, therefore, your return on investment. Prior to any purchase, an investor must analyze comparable properties — including any future developments — to help understand the current market value of the property. What’s more, investors should also examine the property’s neighborhood and its demand.
By doing this research ahead of time, investors can have the confidence they need to feel they are not overpaying for a particular property and that there is demand in the neighborhood for that type of property.
2. Understand the property’s key performance metrics
In addition to researching comparables and neighborhood demand, it’s important for investors to explore a potential investment’s key performance metrics. These indicators can help establish estimates on future performance and, therefore, your potential return on investment. Some examples are:
● Net Operating Income: NOI is a calculation that looks at all the costs and revenue for a specific property. Calculated before taxes, this number provides investors with an idea of how much they will net from the property after all the operating expenses are accounted for.
● CAP Rate: This calculation looks at the value of income-producing properties. The capitalization rate is essentially the ratio of NOI to the property’s value. It helps investors get an estimation of future proceeds or cash flow.
3. Don’t buy bigger than demand
It can be easy for real estate investors to be eager and over-purchase in a particular market. However, doing so can potentially impact the marketability of a property when it’s time to sell. If you purchase a 30,000-square-foot building, for example, the pool of potential buyers could be smaller when it’s time to sell — simply because of demand.
This goes back to doing your market research and understanding the local real estate climate prior to making your purchase. It also means thinking about your potential exit strategies to ensure the returns you’re expecting are even attainable.
4. Consider the improvement opportunities
No matter the type of commercial real estate you’re investing in, it’s always wise to consider the improvement opportunities that could help boost the property’s value. In today’s market, LEED and green building improvements are popular with tenants, as are any renovations that improve the technology within a building.
Of course, the types of improvements that offer the biggest potential for returns will vary based on property type, market demand, comparable properties, and more.
Make Sure Your Financing Supports Your Objectives
Lastly, savvy investors know that finding the right commercial real estate funding can make or break your ability to see a nice return on investment.
If you’re curious about the benefits of investing in commercial real estate or need help finding the right funding options, our team at Investment Property Loans is happy to help. Connect with our team today to learn more!
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