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5 Tips for Investing in Commercial Real Estate

Melanie Orwell 2016-08-04 11:00:00

There is no doubt that commercial real estate can be a superb investment. This is especially true in the Toronto area because businesses are clamoring to station themselves in the city and it has become increasingly difficult to find commercial properties on Yonge, King or Bloor Streets.

Simply put: if you're investing in commercial real estate then you could earn huge profits.

Of course, like anything else in the investment world, there are risks, concerns and questions that need to be asked. It is crucial to get the knowledge and facts before you venture into this realm.

With record-low interest rates, a lack of supply in Toronto and access to cheap money, this would be a prime opportunity to pour some of your money into a commercial property. One of the main concerns is city hall, a place where bureaucrats and politicians are slower than snails.

Are you moving ahead? Here are five tips for investing in commercial real estate:

The Initial Investment is Costly

Once you proceed, you will need a large sum of upfront capital for your commercial property. The amount is much greater than a residential acquisition. Moreover, if there are things that need to be maintained, repaired or replaced before tenants or businesses move in then this will add to your overall initial costs. Just be sure you know the costs before you plunge head first.

You Will Have Many Commitments

As you hold a commercial property, you will have an array of tenants, businesses and organizations. Also, you will have a large file of leases. In other words, you will have a lot of commitments so you will need to ensure you're organized, easy to contact and ready to conduct maintenance, address safety concerns and allocate additional emergency funds.

Let's face it: if you're an honest commercial property owner then your reputation will be heightened. This will also mean that your tenants will be on time for their payments.

Learn What the Insiders Know

This can be difficult to attain, but it can be sometimes a necessity if you want to succeed in the commercial property market. You have to learn what the insiders know, whether it's the state of the market, insider terminology (see below) and the financial element of commercial property. You may not understand it right away, but as time goes by you'll become rather savvy. If you need more information, you may be interested in learning about the commercial real estate services and insights available online.

Understand the Key Metrics

Similar to other types of investments, you will need to come to grips with some of the key metrics in the commercial real estate industry. These metrics will ensure you're making money.

Here are some of the important commercial real estate metrics you will have to know

  • Cap Rate: a way to calculate the value of income producing properties.
  • Net Operating Income (NOI): a calculation whereby you valuate the property's first year gross operating income and deduct the operating expenses for the first year.
  • Cash on Cash: a method of comparing your first-year performance of competing properties.

Study the Neighbourhood

Finally, if you're considering trying out other neighbourhoods of the city then you will have to study those areas to determine if it would be a prudent investment. Indeed, you're guaranteed to make money in places like Yorkville, Rosedale and Leaside. However, if you want to maximize your investment then you may consider parts like Parkdale, High Park and Don Valley East.

You should study things like median incomes, how many Starbucks locations are in the area, the number of residents, crime rates and the list goes on. These metrics will help you conclude if entering into a neighbourhood outside of the downtown core will be a wise move.

Commercial real estate investment in a city like Toronto can mostly be a sure thing. However, there are always risks and concerns that need to be addressed. Sometimes you may have deadbeat tenants or there may a credit crunch in the financial markets. This is why you have to protect yourself and ensure that you are ready in the event of any potential downsides or crashes.

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