In the Golden State, multifamily developments are on the rise, especially its Bay Area. Even the industrial sector in Los Angeles, Sacramento, San Jose, and Oakland has seen a steep rise in rents in recent years and so far, has the lowest vacancy rates.
Such types of income-generating rental properties including office and retail buildings fall under commercial real estate. Although highly lucrative with continual cash flow, commercial property investment can be riskier if you are an investor who is starting to diversify your portfolio. But with the right strategies and a thorough understanding of different types of transactions, you can earn increased returns.
Commercial Property Investment: The basics
1. Understanding the multifaceted transactions
The first approach should be about finding out whether the commercial property meets your financial criteria. For instance, the costs in cash flow and value-add units differ from one another when you want to lease them.
If a commercial unit has a low cash flow, it does not necessarily mean that you should be investing in a building with a higher cash flow that includes other potential risks.
Similarly, when you are investing in a value-add property, it is important to consider that it will require renovation and there will be deferred maintenance costs before you lease it out. The cash flow will be lower in the beginning but will increase eventually.
As cash flow properties are leased immediately, the income can be used for investing in another unit. On the other hand, value-add buildings have a general holding time of two to three years. For that, it is important to determine if the commercial property is in a high appreciation neighborhood.
2. Investing in Multi-family Properties
Even if you are planning to invest in a multi-family building, it is essential to determine first if you are going to spend on renovation costs before leasing it with higher rental rates or renting the units at low costs. When you opt for the latter, you will have lower vacancy rates with low expenses. With the former – to attract residents – you may have to lease below the existing market price and spend more on maintenance.
3. Choosing Triple-Net Lease (NNN)
With this type of property lease agreement, the lessee agrees to pay for the building’s insurance, real estate taxes, maintenance costs, and utility bills apart from rent. Generally, this agreement applies to tenants who opt for retail units and saves a lot of time and resources for commercial property owners. However, with this strategy, there are lesser returns. Apart from that, it is also important to first understand whether the tenant is reliable or not, and if s/he is part of a publicly recognized organization.
4. Commercial Property Financing
Investing in commercial properties also requires a thorough understanding of interest rates, amortization period, and duration of the loan. Typically, investors for such rental units should be able to endure a larger financial commitment as compared to residential real estate investors.
The existing prime rate (known as the lowest rate borrowed in the market), and how banks borrow it to give you a loan, determine the overall costs of interests. If the bank is offering a longer amortization period, you will pay less monthly, but the interests would be higher. Also, the duration of the loan is generally clubbed with the lease’s length. For commercial property investment, both the loan and amortization should go hand-in-hand.
5. Opting Commercial Property Management
Commercial property management is not required when you choose a NNN lease. However, it is one of the best ways to get better returns while saving your time and money on regular maintenance and collecting bills. Just consider if you want a manager to oversee all aspects of your commercial unit, you will also have to pay a higher amount.
A convenient way to manage your commercial property investment
In California, if you require such services, you can decide on Beach Front Property Management for managing your commercial investment. Apart from helping you understand all of the above strategies, we also provide better analysis by documenting the finances to make sure you make the right decisions. Contact us today!
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Trevor Henson
Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…Learn more about how we can help. Customized solutions for large portfolios!