5 Unknown Traps to Avoid While Investing In Commercial Real Estate
19 Nov 2019
With the growing financial literacy of the country, a large number of citizens are looking forward to making investments to obtain fruitful returns. One such investment option that holds the potential of earning high returns is the real estate investment. Any type of property, be it a residential or commercial property can serve as a great investment option. However, it is observed that investing in commercial real estate is often financially more rewarding than residential real estate investment. Commercial properties may refer to retail buildings, warehouses, industrial buildings, etc. Though investing in commercial real estate may seem to be a lucrative deal, it is essential that you study the property carefully before purchasing it for investment purposes. Moreover, you should also avoid the unknown traps while investing in commercial real estate.
Some of the traps to avoid while investing in commercial real estate are mentioned below:
Not researching the type of commercial property
The commercial real estate property is majorly divided into five main categories, namely, industrial, office, multifamily, retail, and special purpose. Apart from these, there are various other types of commercial properties such as medical, hotel, self-storage, etc. The overall profitability may vary from one type of commercial property to another. Therefore, it is always recommended to research the type of commercial property carefully before investing in it.
Not understanding the area demographics and trends
Before making any kind of investment in commercial real estate, it is important that you understand the demographics and trends of the area carefully. The supply and demand may differ from one area to another. Thorough market research of the area will help you understand what type of commercial property is most viable for that particular area. You can also consider taking help a local broker who understands the area and is well-versed with the civil engineering and environmental laws of the area.
Not researching the tenants and their income
If the commercial property that you’ve chosen to purchase already has tenants, make sure that you gather adequate information about them. Understanding the kind of business they run and knowing their earnings will give you a fair idea about the chances of the tenants staying in your property for long period. It is essential that you make a note of their rent to sales ratio. The lower the rent to sales ratio, the higher are the chances of tenants staying in the property for a longer duration. Usually, a rent to sales ratio of under 5% is considered good. If the rent to sales ratio exceeds 5%, it is advisable to avoid purchasing that property as the tenants may move out within a short span of time. Finding a new tenant may take time and you might end up bearing some loss. Therefore, it is advisable to research the property and its occupancy before investing in it.
Not having an active approach
Commercial real estate is an active investment and it requires active participation from the investor. In order to ensure that your commercial property is achieving its maximum operating potential, you must keep a constant check on developments and economic trends in the market. Therefore, an as investor, you must always be on your toes and look for options that can help you make the most of your commercial real estate investment.
Not finding the right source of financing
Buying a commercial property for investment purposes may require a substantial amount of capital. If you are worried about the high valuation of commercial property, it is essential that you find the right source of financing. With leading financial institutions, you can avail commercial property loans at the most competitive interest rates. Minimal documentation and flexible repayment options are some of the added advantages of availing commercial property loans prominent financial institutions. Moreover, you can avail your desired loan through a hassle-free online application process.
Before availing a loan for purchasing an investment property, you must evaluate your creditworthiness and repayment capacity carefully. Your first preference should be purchasing an investment property without borrowing money. However, in case you decide to go ahead with a loan to finance your commercial property purchase, make sure that you can afford to pay timely EMIs without being dependent on rental income. Also, it is essential that you do not over-borrow for purchasing an investment property and try to pay maximum amount as down payment. Make sure that your investment property doesn’t prove to be a financial burden as it can take a toll on your credit score in the long run.
Some of the important things to consider before investing in commercial property are mentioned below:
You must make sure that there isn’t any lien on the commercial property you are planning to purchase. Also, do not forget to make a note of various other external factors that may affect the property’s value in the future. You should only buy the commercial property when you are completely satisfied with your research.
It is recommended to start by investing in small commercial properties. This will reduce the risk of huge losses. Once you become more comfortable with managing your investment properties, you can consider purchasing a larger property with higher income potential.
With the help of various loan products available at Finserv MARKETS, you can successfully finance your commercial property purchase. Easy application process, minimal documentation, instant approval and quick disbursal of the loan amount are some of the added advantages of loans available at Finserv MARKETS. Moreover, you can also customize your loan to best suit your needs. Since loans are available at competitive interest rates, the overall cost of borrowing is reduced in the long run, thereby allowing you to save a large amount of money.
So why wait? Invest in real estate today by availing the right credit product. Lastly, do not forget to read the terms and conditions of the loan agreement carefully before signing it. In case of any query, you may consider taking help of a financial or legal advisor. This can help you avoid any inconvenience in the later stage.
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