Land speculation and land investments have driven American fortunes and markets since colonial times. Enterprising merchants or landowners with an extra dollar (or a million) are always interested in increasing their fortunes through the purchase and sale of commercial real estate. Finding a good investment, though, can be tricky. How do they do it?
Identify the product
Most people consider commercial real estate to be a business property, such as the land and buildings occupied by a restaurant, factory, or retail store. In reality, however, this term is used to describe any type of land or building besides that of a single-family house. Other types of commercial real estate include duplexes, apartment buildings, schools, or even empty land.
Define a goal
Decide the purpose of the investment before making a purchase. Some people purchase commercial real estate to re-sell it for a greater value, while other people plan to rent the buildings or property. Still others plan to establish a business enterprise on the site.
Starting a new business
Some investors decide to open their own business, and choose a property with an already existing building that can be converted into the store or restaurant they are planning to open. Others build a new building and open a bar or other business instead. While owning the property on which a business is situated can have some advantages, this approach also requires a greater investment of money in the beginning.
Renting
Many people buy commercial properties for the purpose of earning additional income. Some investors purchase mini-malls or other groups of buildings and rent them to individual business owners. Some buy an apartment complex and hire someone to manage and maintain the property.
When the economy is in good condition, even if the rent only pays the mortgage, the investor can expect an eventual return on his or her investment. This is because, when the market is stable, real estate values continue to rise.
As the real estate value continues to grow, and the amount of the loan continues to decrease as it is paid off, the owner builds equity in the land. As a result, many owners end up owning land that is worth far more than they paid for it.
For example, the United States government paid only $15 million in 1803 for a parcel of land known as the Louisiana Purchase. This land area includes six entire states and many other partial states, including the city of New Orleans. Today, the land area in the city of New Orleans alone is worth far more than $15 million.
Time your plans
Don't expect that commercial real estate property values will increase a week or even a year after they are sold. The appreciation of real estate often takes time. When buying commercial real estate, plan for the long haul, and don't overspend.
Evaluate the property, determine an acceptable risk level, and decide on a maximum spending amount. Investors who are planning to rent out the property should determine whether all or most of the property's expenses will be met by rental incomes.
Many investors buy properties, expecting to turn a profit immediately. Most properties operate at a lost for as much as the first two years after purchase. As a result, many lose their investments as a result of inadequate planning. One way to avoid this is to consult commercial real estate books or investment experts.
Effective management
Before making the purchase, determine what type of property is desirable - and feasible. A busy investor living in another state may not find a large apartment complex suitable unless he or she hires an agent or manager to run the complex. On the other hand, a semi-retired investor may be better able to oversee the daily management of a large rental property.
Know the market
Before buying, evaluate the market. What is the current market price of other similar businesses in that area of the city? Is a downtown location worth the extra potential expense of higher real estate prices? Is the property in a neighborhood that is conducive to business? If other businesses nearby look profitable and prosperous, the business may be a good investment, but if other businesses are doing poorly, a wise investor may spend his or her money elsewhere.
Buying commercial real estate involves much more than just buying a large piece of empty land and waiting for excited buyers to offer much more than you paid for the lot. Wise investments require extensive research and careful planning. If you aren't familiar with commercial real estate investment, consider hiring someone who is. The extra cost may be well worth your while!