By: Adam Burroughs | 11:50am EDT June 24, 2019
Investing in commercial property is a great opportunity, but it means more than just accepting checks from tenants.
“Property owners must pay attention to the asset to make sure it stays in good shape — both in terms of structure and occupancy — because eventually it will be sold,” says George J. Pofok
Smart Business spoke with Pofok about what first-time investors in commercial property should know before committing to a deal.
What should investors understand about investing in commercial property?
It’s important first to understand the market being considered and the type of product — industrial, retail, commercial office — for investment.
When it comes to location, investors should study the market to understand the difference between the value of the bricks and mortar vs. a property’s cash flow potential. For instance, if the building goes vacant, the investor should determine ahead of time the rent that can be charged when backfilling the property. If the occupant companies at the time of the investment are paying $7 per square foot, but the true value of the market if a new tenant were to enter is $4, then the investor will need to account for the disparity between what’s being paid now and what the market will bear.
Does investing in commercial property mean becoming a landlord?
Investing in a commercial property usually means becoming a landlord. There are absolute triple net investments through which tenants are wholly responsible for the property, but with most investments investors are responsible for the maintenance and upkeep of the main building components. This is something investors need to understand from the start. They won’t just get a check every month. They will have management oversight responsibilities.
Where should someone interested in investing in commercial properties start?
Start by consulting with a real estate practitioner to find out what investment opportunities exist in the market — currently, industrial and multifamily are generating a lot of investor interest in the Northeast Ohio market. There are many outside investors buying into Cleveland and other Tier 2 cities, principally because the rate of return is higher than they’d get in Tier 1 markets like Chicago or Los Angeles where there’s a lot of competition, which is driving down the cap rates and creating higher barriers of entry.
Real estate practitioners have a complete database and market knowledge. They can also connect investors who are looking to partner with others on larger properties or building larger portfolios.
How long until investors realize a return?
Investors can make a return in that first year, as long as they invest intelligently. But how long an investment is profitable depends in part on market conditions. In today’s conditions, there is limited product and lots of investors chasing deals. Acquisition prices are high compared to recession prices, the latter of which led to conditions where cash was king and property owners were willing to take less money to solve a problem and get out.
Who should first-time investors work with?
Talk to an attorney to make sure the corporation used for investing in commercial property is set up appropriately. In addition to the real estate practitioner and legal adviser, it’s a good idea to consult with an accountant on any real estate investment. Work the due diligence with this team, and along the way make connections with trade professionals such as roofers, structural engineers, plumbers and electricians to ensure the property is structurally sound and that it remains attractive to existing and prospective tenants.
Also, pay attention to the tenants and make sure they’re in good financial shape because it’s a significant setback if one is lost before its contract term ends. Pay attention to lease dates and stay ahead of any renewal option dates because it’s easier to renew than to find new tenants. Many real estate practitioners watch lease expiration dates and will poach tenants when owners aren’t paying attention.