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7 Things to Know Before Investing in Commercial Real Estate

Commercial real estate can be an incredibly lucrative investment. With long-term potential and the ability to create generational wealth, commercial real estate investments offer a tremendous opportunity for those willing and able to step into the industry — but before you do, there are a few factors to consider. Commercial real estate requires a different kind of preparation than residential real estate, so even if you have experience with single-family rentals, you will want to familiarize yourself with the particulars of commercial property and prepare accordingly.
Whether you’re looking to get into Menlo Park commercial real estate or commercial properties in any of the Bay Area’s affluent neighborhoods, review the following list of seven things to know before getting into the commercial investment game and maximize your potential for success.

1. Location

There is no question about it — in real estate, location is everything. From highly coveted foot traffic destinations to on-the-rise neighborhoods brimming with excitement, where you invest is one of the most critical factors in determining your future success. For example, considering all the active commercial districts in Menlo Park, this area is an outstanding option for commercial investing. If you are passionate about style and upscale experiences, a luxe retail complex like Stanford Shopping Center might be the right fit.
An expansive development project like a luxury shopping center offers a high number of potential tenants in one spot, which increases the monthly income and provides security. Even if a tenant leaves, there are plenty of other businesses to make up for the loss of rent. Whichever type of property you choose, just make sure the location you find fits the nature of your investment.
Shopping centers need a large area for parking spaces, harbors and ports will attract tenants in manufacturing, export, or import industries, and hotels may thrive best when situated near an airport. You will also want to look into your chosen area’s permit approval process and timelines, as these can have a significant effect on your investment. Take your research a step further and consider the perceived supply and demand for the future of your potential investment, and you’ll be ahead of your competitors.

2. Tenancy

When considering a commercial property containing a roster of existing businesses, research the tenants, their financial health, and the terms they are operating under. This information can tell you a great deal about the viability of this particular investment. Commercial properties are generally more lucrative than residential real estate and enjoy less turnover, but other factors can make the deal especially sweet — like finding a scenario where tenants have a triple-net lease. Also known as an NNN lease, this contractual gem requires tenants to cover property taxes and building maintenance in addition to rent and utilities, which, in turn, mitigates your risk and maximizes your return.

3. Property types

Commercial real estate consists of varying property types — industrial, office, retail, multifamily, and special purpose top the list, as well as self-storage, medical, and hotel options. Not all commercial real estate is created equal, and risk assessment can differ from one to the other, so make sure to research your proposed property thoroughly before committing. Multifamily apartments and self-storage facilities are generally low-risk but require different levels of care, while restaurant tenants have a reputation for defaulting on rent more often than other businesses. So plan your property choice, and subsequent insurance coverage, accordingly.

4. Market Dynamics

Market trends are essential pieces of information when searching for your dream home, and they are just as vital when researching commercial investment properties. While commercial real estate tends not to experience the dramatic market shifts of more traditional investment opportunities, change is inevitable and can affect stability, cash flow, and vacancy rate. Take time to identify which businesses are stimulating the economy, and you’ll gain insight into the commercial real estate property with the highest potential.

5. Tax benefits

Commercial real estate provides unlimited opportunity for the kind of high income necessary to build generational wealth. The tax benefits are equally valuable, so consult a knowledgeable tax advisor or investment manager to maximize the money you bring in and minimize the money you are required to pay out. Commercial property offers opportunities for significant tax deductions, as well as 1031 exchanges, a legal strategy to avoid capital gains tax.

6. Expect the unexpected

Whatever your commercial investment of choice may be, you’ll need more financing and more time than you think. To give yourself and your property the best chance of success, you will want to create both a capital reserve fund and a cost contingency budget — even if the property has been paid in full. A capital reserve fund is an account with money set aside for any unexpected expenses or long-term improvements (Forbes recommends setting aside 20 cents per square foot every year to keep your reserve healthy), while a cost contingency budget can range from five to 15%, depending on property type and performance.

7. Patience is key

In commercial real estate, patience is not only a virtue, it is essential. Investments of this scale can be incredibly lucrative, but be prepared to wait before seeing the return. Most commercial real estate ventures are beneficial in the long term, and rushing to see dividends can derail the process. New investors often set unrealistic timelines and are surprised by the amount of time renovations, new construction, and implementation of new systems can take. Be prepared to sit back and breathe deeply while the moving parts find momentum; your patience will likely reap impressive rewards.

Work with an experienced commercial real estate agent

Just like finding the right agent is a must for residential real estate, commercial real estate requires a level of expertise and familiarity with the local market and commercial investing specifically. To explore your future in commercial real estate, contact commercial and residential real estate agent Marc Hayden Bryman who will be happy to guide you through Palo Alto commercial real estate and other exciting neighborhoods and opportunities in the Bay Area.

Work With Marc

Marc has been responsible for more than $900M in transactional and joint venture revenue since he began his real estate career in New York City in 1998. Work-Play-Live-Invest! Contact him today.

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