Buying commercial income property may seem as easy as choosing a well-known franchise, finding a reasonably priced property, and making the purchase.
And since vetting a commercial real estate property can take a great deal of time and energy, you might be tempted to skip all the to-do, and go straight for the gold.
That might be fine if you plan on being an average investor. However, great investors don’t just look at the obvious; they DIG DEEPER to find the flaws that can hemorrhage the profits right out of a costly investment.
Let’s dig deeper into some common problems to look for.
SHORT TERM LEASE
Income properties with pending or outstanding lease renewals place the burden of finding a new tenant on you, the owner. A longer lease not only protects your investment from economic downturns, but is also a key sign of a well-established, STABLE business.
Instead, look for a property with a long lease, preferably a triple net, where tenants sign leases from 10 to 25 years.
INFERIOR TENANT CREDIT
A tenant with poor credit can be even more damaging than getting stuck with an empty property. Not only do you end up losing large sums of money due to unpaid debts, but you’ll also incur the expense of removing the tenant before the completion of the lease.
Before you sign a lease, make sure to ask for the payment history of the tenant from the present owner. If the present tenants possess outstanding debt, make sure this amount is either paid before you buy the property, or have the amount deducted from the purchase price.
Even a well-known franchise will have difficulty surviving in a poor location. In order to evaluate whether or not a prospective property is in a reasonable location, you should investigate these factors:
Is the location consistent with the image of the business? Are the zoning laws adequate not only for present needs, but future ones as well? Is the business located in a high crime area? Are the surrounding businesses competing or complementary? Keep in mind that some businesses draw more customers when located together. Car dealerships, for example, are usually located together, allowing buyers to compare similar models. What is the traffic flow like? What size is the parking lot, particularly in relation to the general availability of parking in the area?
The answers to these questions will give you a better idea of whether or not the commercial property you’re interested in is likely to be a profitable investment.
The demographics of an area reveal a great deal about a property’s present and future income potential. Ask yourself these questions in order to identify critical demographic trends for a prospective income property:
Is the population of the area increasing or decreasing? Are there new commercial or residential developments being built nearby? Are home prices in the area increasing or decreasing? What are the local income and household spending patterns?
Most of this information is easy to find online. One site, City Data, has an extensive database of statistical information, and will allow you to investigate nearly everything there is to know about a city or county.
As a serious commercial real estate investor, you can’t afford to waste time or money on unprofitable income properties. Use the suggestions above to help you acquire a property that helps you not only meet, but beat, your real estate investment goals.