Commercial real estate investment is a significant undertaking. Few buyers sign contracts to purchase commercial property in Tampa (or anywhere else!) on the spur of the moment or without completing extensive due diligence to assess whether the transaction makes sense and will yield profitable returns.
Asking questions is a part of that due diligence. The first step in deciding whether a given opportunity fits the bill is to know what you want to achieve with your investment.
Here are 8 questions all prospective buyers of commercial real estate in Florida should ask before taking the plunge.
Are you in the right place?
That isn’t just a cliche piece of real estate advice. The success or failure of commercial property investment is typically determined by whether the property is located in a location that can attract renters and consistently produce high occupancy rates.
This is generally determined by the commercial property’s nature. What may appear to be a desirable industrial or warehouse property may be a desert for retail tenants that want visibility and foot activity. Also, look at the longer-term economic, employment, and demographic estimates for the area in which you’re investing.
The more you know about the type of commercial real estate in Florida that you want to invest in and the individuals who will lease or buy it from you, the easier it will be to start narrowing down your alternatives. While a piece of commercial real estate in a prominent location may cost more, it will help you get a better return on your investment in the long run.
How much time do you have for managing the property?
When you purchase commercial property, you are also purchasing the day-to-day and long-term management obligations that come with it. If you’re a first-time commercial property owner, keep in mind that property administration requires a significant amount of time.
Existing leases may hold you responsible for all of the property’s upkeep. While you can employ someone else to manage your property, make sure to consider the fees of hiring a management company.
Do you have what it takes to be a landlord?
Inexperienced investors are often unaware of how tough it can be to own commercial real estate. You’ll need to find renters to recoup your investment once you’ve purchased commercial real estate. You’ll essentially be a landlord, which comes with its own set of obstacles.
Choosing the proper tenants, collecting rent, and managing commercial real estate can consume a significant amount of your time. Before investing in a piece of commercial real estate, make sure you’re ready for the endeavor.
A smart alternative is to hire a property management company to assist you with the responsibilities of being a commercial landlord. The money you pay these companies will be well spent because they may relieve you of a lot of labor. Tenant screening, rent collecting, and basic upkeep are all tasks that most property managers can handle.
Do you have an exit strategy in place?
Any commercial real estate investment should have a flexible exit strategy. Although the long-term appeal of your investment property is important, the exact investment terms you agree to can have a significant impact.
The best circumstances for ensuring a flexible exit plan are long assured income periods. They give investors the option to exit at any point during the investment cycle while also offering buyers competitive terms on a fully functioning and established venture.
Guaranteed buybacks are another typical investment requirement. While these can still give flexibility, they should be thoroughly examined before investing. Any guaranteed buy-back should be based on a proven business strategy rather than simple projections.
What is your projected ROI?
You can earn from commercial real estate deals in two ways: free cash flow and sale profit.
Simply said, free cash flow is the profit you make on a property after running expenses. The cash-on-cash return measures the annual free cash flow as a percentage of the total initial cash investment. Monthly or quarterly distributions of free cash flow are common. Cash-on-cash returns for commercial multi-family properties range from 8% to 10% per year, depending on investment strategy and market.
Aside from free cash flow, investors earn from the sale of the property after a few years of holding. When a property is sold, investors receive their part of the equity after paying off the principal debt. The expectation of principal return at the end of the investment period is usually represented as an internal rate of return (IRR). The IRR on syndicated commercial multi-family properties can range from 10-20%, depending on the market and holding time.
Is the price of the property competitive?
Overpaying for commercial real estate can result in a loss on your investment. You should learn more about the local market before choosing the best commercial real estate investment in Florida. It’s critical to find out how much comparable residences in the neighborhood are selling for.
You may make an educated judgment about which properties to purchase based on this information. Working with a seasoned real estate agent is a smart method to protect your investment and discover a great bargain on commercial real estate in Florida.
Is the commercial property occupied or unoccupied?
A commercial lease is essentially an arrangement for guaranteed revenue for a set amount of time — and commercial lease terms can be as long as five or ten years, or even longer. This is why a business property’s value is strongly influenced by the term and derived revenue of its lease.
In a commercial property lease, it is usual for tenants to pay for the costs of owning and operating the property in addition to the rent. The lease agreement should be carefully examined to determine how much of the property taxes and fees can be recovered from the renter.
Who are the tenants?
Depending on the type of commercial property, there will most likely be one or more tenants occupying the building. In order to assess the risks, an investor will need to know basic background information about the tenants and their current lease conditions.
Buyers should get a rent roll, credit files for tenants, and payment history. A rent roll will include the renter, including how much rent they pay, whether they pay common area charges, the lease terms, and when the lease expires. You’ll be able to tell which tenants need to be evicted based on their credit files and payment history.
The decision to invest in commercial real estate is ultimately a personal one. It’s a decision that should be taken in light of your other investments and preferably with the help of experts in the field.
If you’re a first-time investor in the Florida commercial real estate market, Bounat is here to help you answer all of these questions to maximize your investment. We have the experience and expertise in the Florida market to partner with you every step of the way – contact the Bounat team today.