In one of our previous blogs, we laid out a number of risks associated with various types of commercial investment property and commercial real estate investments.
Today, we’ll cover ways that you can overcome these risks to reap the profits in the form of questions and answers you need to gather before moving forward with any commercial real estate investment purchase.
Considering Commercial Real Estate
Questions to Ask & Answer
Before you begin the process of pursuing a commercial real estate loan or looking at specific pieces of commercial real estate, be sure to ask (and answer) the following questions of your agent, the current owner, your team, and even yourself:
- What kind of property am I looking for and why?
- What is my risk tolerance threshold and what kind of projected profits alter that?
- Do I need to hire a property manager or dedicated office staff?
- How long do I want to have my cash tied up in this asset?
- Can I afford to have cash tied up in real estate long term?
- What is the projected LTV (loan-to-value ratio) of the property?
- What is the current owner’s annual profits over expenses, or cash-on-cash?
- What is the property used for vs what could it be used for?
- Why is the owner selling?
- Are there any repairs or improvements that need to be made immediately?
- Is the surrounding area developing in a way that benefits this property?
- Is the total cost of the purchase price, improvements, and initial operating costs worth the investment?
Based on the answers to these (and other) questions, you may want to reconsider your willingness to invest in commercial real estate. The last thing that the financial experts at Private Lending Group want to see is an investor that wasn’t ready to take on the challenge do so; be honest with yourself and your team about the best possible future direction for your assets.
If you have looked over the property on paper, then it is time to start scoping out the building and area in detail. The next steps for your investment is to compile a team of advisors, experts, and employees to thoroughly look over the location. Inside and out, every detail about the property should be analyzed for potential risks, opportunities, and threats.
Keep in mind that each investment opportunity is different and individual in its own way and not all opportunities are created equally or will pay out equally;
while it is impossible to know for sure if a given property is the best possible investment you can make, you have to be willing to walk away from something looks or feels off in any way.
When scoping out your potential property’s location, look for the following:
- Everything you can possibly find out about the immediate location
- Greater trends of the city, local business stability, trends, and other pertinent trend information
- Walkthrough the property with a discerning eye for flaws that could break or alter the arrangement on the table.
- Begin discussing and planning potential changes with city officials, experts, and contractors to see how possible the upgrades are and what they may cost