When it comes to commercial real estate, research is fundamental. From different property types to deal structures, it can be a legal and financial minefield for the uninitiated. Additionally, there are market factors at play and economic considerations that impact the CRE marketplace.
Due to this, we're examining ten critical considerations for investing in commercial properties and how experienced property managers in the Chicago area are helping investors locate lucrative deals. We also offer you a glimpse into how experienced property managers in the Chicago area help investors like you locate lucrative deals.
1. Property Type
Commercial property is generally riskier than residential as while 'comps' may give a great indication of the future of a residential building —commercial relies on the commercial activity and success of the tenants inside.
The most common commercial property types include:
- Office
- Industrial
- Multifamily
- Retail
- Hotels
- Mixed-use spaces
Market conditions can also dictate the success of a particular commercial property type. For example, during the covid-19 pandemic, office buildings and retail commercial markets slowed considerably. Therefore, it's essential to consider the range of risks involved in the property and business activities conducted within the building.
2. Budget and Financing
A balanced and conservative consideration of your cash flow and budget is necessary to determine the best deals for your goals. It can also give a better picture of factors such as where you can invest, the size of the asset, and the asset type.
Commercial deals are costly, and your capital is tied up in a long-term investment plan. Complex arrangements are often restricted to high-income individuals or asset-rich investors known as accredited investors. However, this is not always the case.
To begin, examine your:
- Cash flow
- Financing captions
- Financial commitments
- Projected cash flow
- Cash reserves for hidden fees such as renovations, maintenance emergencies, or property taxes
An examination of your finances can also determine how you enter a deal. For example, a high-income earner may consider joining a syndication as a general partner, or a newcomer to the commercial real estate world who wants to minimize their cash risk might consider becoming a shareholder in a REIT.
3. Location
Do you want to be close to the property, or do you have the nerve to be an interstate investor?
Location is not only where the property is geographically. Proper consideration of site means:
- Demographics
- Job market
- Migration patterns
- Median income numbers
- Tourism
Plus, a range of additional factors impacts the overall demand for a commercial space. While properties in central business district areas and tier-one cities are commonly the most desirable option, investors are looking to suburban locations such as the real estate Chicago suburbs offer for better deals and more longevity.
4. Investment Purpose
Having a clear action plan and clarifying your investment purpose is essential. Are you investing for capital gain or cash flow?
For example, if you're investing for cash flow, you might want to consider a multifamily building due to the monthly rental payments from multiple residents. Or, consider converting an abandoned building into office space if you are investing for capital gains.
Determining your purpose will allow you to strategize effectively.
5. Property Value
A professional estimation of the property value will help you understand your capital obligations and the deal's validity.
Examine historical trends, market demands, and future projections of the investment. As discussed, factors such as covid-19, work from home, high-interest rates, and inflation throughout 2022 severely impacted the CRE market. While some industries performed well, others are still playing catch up. Conducting a thorough risk assessment based on the property type is essential.
6. Projected ROI
To give some idea of the projected ROI of the investment opportunity, consider factors such as:
- Occupancy
- Rental rates
- Projected appreciation
- Any value add opportunities
Market trends, the economic climate, and indicators can also help provide context around the projected ROI. Working with a professional property group specializing in a particular investment zone is one of the easiest and most accurate ways to determine an appropriate ROI.
7. Property Characteristics
One of the benefits of commercial real estate investment is the variety of options open to investment.
In addition to the different property types, there are variations, such as size, infrastructure, amenities, layout, and overall condition. While some properties may be ready for commercial use, others might require some upgrades or additional investment.
8. Local and State Laws
It's essential to familiarize yourself with the local and state codes that govern commercial real estate in the area you're interested in.
Some considerations include the following:
- Zoning
- Rental laws
- Building codes
- Noise restrictions
- Tax values
Complying with legal restrictions will help you avoid hefty fines and inconveniences down the road.
9. Market Timing
Favorable market conditions and a deep understanding of the dynamics of the property can help you solicit the best deal possible. Unfortunately, as is the nature of investing, there is no way of knowing what's around the corner. Working with property specialists can help optimize returns and reduce the risk profile regardless of market conditions.
10. Property Management
Commercial real estate involves complex legal, economic, and financial processes. As an investor, it's essential to consider the level of involvement you want to have in administering the asset.
For many, hiring the services of a reputable property management company means the day-to-day operations, tenant relations, property maintenance (and more) are in good hands.
Evaluate These 10 Factors Before Investing in Commercial Properties
Commercial real estate investing is a step up from residential and involves an expert understanding of the legal and financial processes that underpin this investment class. To help you work through crucial factors and invest in the best Chicago properties for your goals, Brian Properties is here to help! Reach out to our team!
You can also get a free copy of our "Ultimate Guide to Investing in Commercial Real Estate" by clicking the link below.
