Ask any real estate professional about the benefits of investing in commercial property, and you'll likely trigger a monologue on how such properties are a better deal than residential real estate. Commercial property owners love the additional cash flow, the beneficial economies of scale, the relatively open playing field, the abundant market for good, affordable property managers and the bigger payoff from commercial real estate.
But how do you evaluate the best properties? And what separates the great deals from the duds?
To be a player in commercial real estate, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage. That's not the case with individual homes. You'll also see a bigger cash flow with commercial property. The math is simple: you'll earn more income on multifamily dwellings, for instance, than on a single-family home. Know also that commercial property leases are longer than on single-family residences. That paves the way for greater cash flow. Lastly, if you're in a tighter credit environment, make sure to come knocking with cash in hand. Commercial property lenders like to see at least 30% down before they'll give a loan the green light.
The best way to find the most profitable investments? Hire an experienced agent. Give us a call. We just happen to know a few.
Commercial real estate differs from residential in many ways, including the metrics by which feasibility and return on investment are measured. Here are three metrics you should be familiar with and consider, with the help of an experienced broker.
Net Operating Income (NOI) - The NOI of a commercial real estate property is calculated by evaluating the property's first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.
Cap Rate - A real estate property's "cap" – or capitalization – rate, is used to calculate the value of income producing properties. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.
Cash-on-Cash - Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare the first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn't require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to make mortgage payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial investment.
If you're thinking of starting your own business, or if you're getting ready to change locations for your current business, you're probably anxious to get out the door and start looking at some properties. But rushing into a new location is one of the worst things you can do. You might get incredibly lucky and end up in the right place with the right lease terms — but you're more likely to land in an unsuitable location or sign a lease whose terms will make you miserable for the next five years.
If you're starting a new business, sit down with a pad of paper or a new document on the computer and begin thinking about the following factors that will impact where you look for commercial space:
How much can I realistically afford to pay for space?
How much space do I actually need?
Where do I want to be?
Your location is more than geographic. In a shopping center or mall, the availability of parking, the ease of getting into the complex, and your location relative to other stores are all very important factors.
Should I look at undeveloped properties?
If you're moving an existing business to a new location, your list of questions might be slightly different. After all, this isn't your first rodeo. But even veteran renters can make mistakes, so take a few minutes and ask yourself a few questions:
Why am I moving?
What benefits do I hope to gain by moving?
What's my least favorite thing about my current location?
What's the best thing about my current location?
What kind of space configuration and basic square footage do I need?
When do I need to move by?
Answering these questions will not only help you find the most ideal spot for your business and your budget, but will also decrease the time your commercial agent spends finding it for you!
When negotiating your commercial lease, there are a few things that you should absolutely consider. Including all of the following items in your lease is strongly recommended:
• Corporate entity
• Renewal options
• Assignment rights
• Tenant inducements
Clauses to Be Apprehensive About in Your Commercial Lease
Just as it's important to include certain key terms in your lease, you must also be cautious about what terms are in the lease to begin with and how they may affect you and your business down the road. You may want to remove or adjust some of the following items:
• Percentage rent
• Radius restrictions
• Demolition clauses
• Default clauses
• Relocation clauses
At First & Main, we're experienced in all phases of lease negotiation and renegotiation. We know what to look for and how to protect you from potential pitfalls. Remember, there is never a cost to the lessee in a lease negotiation! And we're happy to review even existing leases to advise you how to handle renewals.