Welcome back to our CRE 101 series! In our last post we explained Commercial Real Estate and some of the reasons it’s a very lucrative investment option. This week we’ll look at some factors that affect your eventual outcome, minus your expenses. This is called ROI, or Return on Investment.
There are quite a few factors that affect the ROI of a commercial real estate investment. These can include anything from the property location, the type of businesses that occupy a property, and the amount of foot traffic that comes through the area. Furthermore broader market conditions that are more difficult to account for can change outcomes and in turn affect your ROI.
ROI and Commercial Real Estate
Investing in commercial real estate is an exciting business. It can be incredibly productive and lucrative when navigated correctly. An expert can help point you in the right direction in this complex field. When you step into the world of CRE investment with the knowledge of what will affect your ROI, you'll know where, when, and what to invest in.
Business Location
Before you jump into a real estate investment, carefully consider the location. Examine what's around your building and which industries impact the part of town you're purchasing. Know how far the commute is to major cities, if applicable, and the public transportation available to bring people to you.
Accessible transportation is not only crucial for potential customers but employees as well. Remember, location will heavily affect your resale value. If you set up shop in an area with little to no foot traffic, far away from major commuting routes, you may be in trouble if and when you decide to sell. For office employees for instance, the proximity of amenities such as restaurants is important whereas for industrial properties, access to transportation corridors may be of greater importance.
Efficacy of the Building
You should know all there is to know about a commercial building from an operational perspective before investing in it. Essential factors to consider that will heavily affect your ROI include how much revenue you can generate from rents and other sources and how much it costs to maintain and operate the property.
Prior to purchasing a property, a professional should thoroughly investigate the building’s systems and structure. To see a fantastic ROI, your property has to be efficient when it comes to everyday operations.
Know Your Demographics
When purchasing a building for CRE, know the area around your location. You want to have access to an employable workforce surrounded by market growth and new businesses that are not merely surviving but thriving.
Focus on areas that are in an upswing, despite the state of the economy. You'll get the most out of your building purchase if the population around it is steadily growing with rising incomes.
Consider the Current Tenants
Investing in a building that already has tenants is attractive but not all tenants are equal. Knowing the difference between national, regional and local (mom and pop) tenants is important to assessing risk factors when buying a property. National tenants are often publicly traded and have a credit rating whereas with local and regional tenants, the strength of the operator is determined by financial well-being of it’s owners and investors. Find out as much as you can about them because if they don't pay their rent, they'll heavily affect your ROI.
Getting Help
While this all may seem difficult to navigate to the beginning investor, help is widely available!
At Fortress Equities we fully understand the inevitable downturn of the economy due to the COVID-19 pandemic. An acquisitional focus on value-add real estate will ensure that we will secure assets from those experiencing the unfortunate reality of selling due to economic distress. For instance, as office leases come due over the next several years we expect to see vacancy rates continue to rise and office values continue to decline whereas the shift to the Amazon economy will continue and well positioned industrial properties will thrive. Similarly, as eviction and foreclosure moratoriums expire, more people will have to rent presenting opportunity in multi-family investment.
Seasoned professionals manage our Fortress Equities Real Estate Value Fund LLC. With decades of experience and relationships and driven by expert knowledge and a sharp eye for profitable real estate opportunities, we remain dedicated to the flawless execution of planned operations as we continue to expand and grow our portfolio.
For more information, contact us!