I absolutely love the thought of buying, improving and owning commercial real estate. It has a fantastic upside, can be leveraged and attracts the best tenants (small business) for long term cash flow. Commercial real estate can be flashy and its truly the top level of investing when it comes to improved property, second only to land investment which just requires a ton of cash it seems. Commercial real estate can be a terrific long term legacy investment that can provide generations a bit of security and passive income but its not all unicorns and push up pops. Commercial real estate can be high risk, expensive and known to take down the wealthiest investors. I have outlined below a few things to be considered before taking the dive into commercial real estate buying and owning. Its good advice and will help you make a better long term decision.
- Differed Maintenance – Commercial buildings can be large and the daily use is typically more then a residence and in some industrial or heavy commercial settings, the buildings just get beat up. Ongoing maintenance and upkeep is critical as an owner and buying a property that may have been neglected is bad. You always want to have a trusted contractor inspect a property and quote repairs needed for a healthy building. Things like Roofs can be 10’s of thousands of dollars and mechanicals just as much. These repair quotes should all be factors in the purchase price and level of commitment you are willing to endure. Also, always have a contractor give you quotes to do all of the work. Relying on your own time and skill set may not be the best option once you get into the project.
- 20 years from now – Many properties are leased and in great shape but what will they be in 20 years and can you do what is necessary to adjust? I am talking about how is the corridor and is it on a downturn. What is the user and will that user type be around in 20 years. Have you noticed the large carpet stores are disappearing and many of the professional services you hire are going online? Take this into consideration whether or not the building you are looking at has the ability to survive into the next generation without a major investment
- Long term lease – We see it all the time a new startup takes on a nice shiny new space and shortly after have gone out of business. This is unfortunate in many ways but must be considered when purchasing a building. What is the potential of landing a long term well funded tenant and if not have you considered the cost of turnover. Every new tenant takes brokerage fees, paint and carpet and sometimes a buildout depending on the user and these are costs that landlords many times endure. If its high turnover be sure to account for it and if it has a lease in place be sure to study it and understand what investment may come along in the future to maintain that lease.
- History – Buildings have history and that can lead to a stigma held by the public making a property sometimes unattractive to the next user. Many times vacant buildings have had crimes or less then desirable activities and people remember this, especially if they were long term tenants. Ask the seller to provide previous tenants and users as a way to head off any surprises when it comes to history of a building. I have listed properties that had these users in the past and sometimes they just have a bad feeling and tenants can sense this. Owning a building that no body feels good in is very bad.
- Environmental – A deal pops up as-is and you know the area, so you offer cash and close. Well one of the worst things that can happen is a property that you own is found to be contaminated causing thousands at minimum to clean up or at worst become un salable. A bank will require an environmental report on properties and if they are dirty, they will most likely not lend the money for the property. That hurts for leveraging or when it comes time to sell if the buyer is financed. Always have an environmental study done at minimum phase 1 if you plan to sell a property. Many investors will take that risk ask they are familiar with an area or just do not see it as a risk, but I always suggest it be done and especially if its new territory to you.
Buying commercial real estate can be smart and create wealth for a family or company but it must be done with caution and plenty of due diligence. When buying a commercial property I suggest consulting your broker with a list of concerns and suggestions whether or not a property is a great investment.
Curt has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.