There are many factors to evaluate when investing in local commercial real estate. What type of tenants do you want on your property? What size space is needed? How much will rent, amenities, and other features cost?
In addition to these questions, every commercial property for sale has its own set of particular needs and issues. The bottom line is that you need to know exactly what you’re getting into before jumping into any property deal.
At Gonyea Commercial Properties, we specialize in helping Minneapolis-St. Paul commercial property buyers ask the right questions upfront. We serve a wide variety of clients and ensure they find the best properties for their commercial real estate investing goals.
If you’re thinking about buying a commercial property in the metroplex, here are five critical questions you need to ask.
1) Does the Property Currently Have Tenants?
When buying a commercial property, the number of existing tenants can tell you a great deal about the potential for success. The occupancy rate indicates how financially strong the property is, as well as how much value it could potentially bring to your investment portfolio.
The type of commercial property typically determines the kind of tenants that may be present and how many. Make inquiries about the occupancy upfront so that you can get the full picture of its cash flow and occupancy.
Remember: you don’t just need to know if there are tenants – you need to see proof, including:
- rent roll
- tenant credit files
- payment history
- any other important documents
All this information will help you understand how much revenue the property brings in and how it will fair as a local commercial real estate investment. The more you know, the more you can make accurate projections about filling future vacancies and retaining the current tenants.
2) What Is the Property's NOI?
Knowing a property’s net operating income (NOI) is crucial when it comes to making income projections and calculating your possible ROI.
To avoid surprises, all potential commercial property buyers should ask for a pro forma – a report that contains an estimated summary of the income and expenses of the property per year. Commercial real estate investors have expenses from day one of purchasing a property, and you shouldn’t be surprised by any of the costs you incur upon investing.
If you have more information upfront, including the NOI, you can compare properties with different metrics and decide which best fits your goals.
To calculate a property’s NOI, you’ll need to subtract the operating expenses from its generated revenue. Operating expenses include the costs of owning and running the property, such as…
- Property taxes
- Management fees
- Maintenance needs
Your potential revenue from the property includes its profits from rental income, parking charges, vending and laundry machines, and more.
3) Are There Development Plans for the Area?
Future development projects can impact the profitability of the property you are considering. In some cases, these plans could seriously jeopardize the return on your commercial property investment.
For example, what if you buy a multi-unit residential property without realizing that a new power plant is going to be developed next door? Or maybe there’s a strip mall for sale on a busy road that seems like a great location, but plans are in motion to build a new highway that will cause most traffic to bypass it.
Scenarios like these could spell disaster for your bottom line and make it difficult to fill units or turn a profit, leaving you with a high NOI. So, how do you make sure you know about any relevant development plans?
A local commercial real estate broker is an excellent resource for any business interested in commercial real estate. Not only will they have knowledge about the property you are looking at, but they will also be able to give an insight into future development plans and real estate trends in your specific area.
4) What Risks Does the Property Pose?
You’ve likely already talked about and studied the potential benefits of the property, but have you fully evaluated its risks? All commercial properties for sale come with potential problems that buyers need to be aware of before purchasing.
These risks can include things like…
- hidden building defects
- a lack of potential tenants
- difficult maintenance needs
- local zoning restrictions
The existence of these potential risks will mostly depend on the building’s location and the condition of the economy in your area. Some risks can be mitigated, while others cannot be fully avoided.
In general, investing in commercial real estate does come with some risk. Downturns in the economy or natural disasters could lead to an economic crisis in the area, making it difficult for tenants and owners to pay their rent and mortgages on time. Additionally, rising interest rates may make it more expensive for building owners and contractors to borrow money, resulting in financial difficulties.
Few investments are ever truly “risk-free.” There are many things to consider when buying a commercial property, and most of them should be evaluated upfront – not after the closing documents are signed. With a thoroughly evaluated list of risks and a positive NOI projection, you should feel confident and knowledgeable about moving forward with your investment.
5) Is This Property Compatible With My End Goal?
Lastly, we recommend that you ask questions to determine if the property truly fits into your portfolio and long-term investment goals. Every investor has a unique set of needs, plans, and aspirations. What’s a strong investment for one buyer might not be a strong investment for another.
Is this a good investment for you and/or your organization? You should also ask questions such as…
- What value will the property add to your portfolio?
- What is your risk tolerance, and are you comfortable with this property’s risks?
- Do you have the capital to purchase this investment property?
- Are there possibly better-fitting options out there?
If you’re not sure about the answers to any of these questions, don’t fret – there are experts out there who spend their careers learning how to ask and answer the right real estate questions.
Let Us Help You Ask the Right Questions
As local commercial real estate experts, Gonyea Commercial Properties is prepared to help property buyers in the Twin Cities region ask the right questions and make the best investment decisions.
Gonyea Commercial Properties is committed to providing professional commercial real estate services to a wide range of buyers and sellers. We are a full-service commercial real estate firm, specializing in the sale, management, and leasing of industrial, office, and retail properties throughout the Minneapolis/St. Paul area.Looking for quality property ownership opportunities? Contact Gonyea Commercial Properties today to learn more.