Are you looking to invest in commercial property? Investing in real estate services is a complex process in which a lot of decisions have to be made after careful consideration. One requires a good grasp of the market, current trends, and potential risks involved. Investing in real estate is quite different from buying a house for yourself and different factors have to be considered.
While there are potential risks in investing in commercial property, the returns are higher and maintenance is lower. However, each investor will have their own set of needs and demands to consider. You need to be knowledgeable and thorough before deciding on which property to buy.
Real Estate Services
Here is a complete guide to factors to keep in mind when considering commercial property as investment:
Different Types of Commercial Properties
Veterans who’ve been in real estate services for a bit categorize different types of commercial properties in the Indian real estate market into three broad categories – prime, secondary or tertiary properties.
A prime property, as is evidenced by the name, is the property that is usually situated in city centers and attracts the top category of tenants. While the price of such property is high, the sale and resale times are short and the return on investment is also high. An example is the Central Business District (CBD) commercial office space and retail spaces that are located in city centers and attract a good client base.
Secondary and tertiary properties are properties that are usually located on city peripheries or less prime locations within the city. These properties are cheaper but attract a more limited client base that is willing to pay less rent or resale value. Industrial buildings like warehouses are generally considered secondary or tertiary properties. Since they are generally situated in the city outskirts, they are less expensive.
Factors for Real Estate Investment
Each property type has its own pros and cons. Let’s dive into each factor and learn how to shortlist these properties for better returns. Please, be advised that these real estate services are offered by many brokers and real estate agencies.
Location is one of the most important considerations when it comes to selecting a property. When deciding on the location, it is very important to consider future prospects. Because an ideal location today can turn into an unwanted location later. One of the primary functions carried out by professionals in real estate services is the ability to make this distinction!
In case of choossing commercial property on sale for the purposes of investment, you must ensure that the area you choose does not have an oversupply of properties. The ideal area is one that has low demand and high supply. In these types of areas, reselling property or renting it out will be very easy.
Large infrastructure projects tend to boost demand for commercial space. Research about which areas large projects by the government are planned in is a good idea. An area where infrastructure projects are coming up will require retail spaces and shopping centres, office parks, and restaurants. Thus, the potential of buying and selling property here will rise as will the price of property per square foot.
The location should also be well connected and easily accessible by numerous modes of transportation. No business can survive without connectivity and the more transport options, the higher the demand for the location.
The property should be in the neighborhood of present or upcoming commercial hubs since this also increases demand. Good social infrastructure like good schools and healthcare services are an added bonus.
Thorough research about a location will involve finding out the tenant profile and the kinds of industries that are present in the area. This will determine the resale potential or the kinds of rents one can expect. Additionally, one can make sure the area is not susceptible to natural calamities like earthquakes.
Budget planning is an important function of real estate services. Your budget is something that you should decide well in advance before you begin your search for property. The kind of property size you can consider will depend greatly on what you can afford. For larger properties, you might have to consider bank loans and mortgages. Large properties cost more to maintain than smaller ones. This should be included in your budget planning. You should also consider the amount of upkeep or repairs the property you are considering will require and include it in your budget.
Physical Condition of Property
Assessing the current physical state of the property is very important. It helps to understand when the property was built and what its original purpose was. A buyer should be aware of the current condition of the property and the repairs it requires. Maintenance costs can drastically alter the resale value of the property in the future. Older commercial property for sale requiring a lot of upkeep are harder to sell.
Deciding your property size will depend on your budget and needs. Mortgages and loans are available for purchasing property and can be useful when you want to invest in a large commercial space. Speak to a banker or an experienced real estate services professional to get an idea what’s viable and feasible for your specific needs.
Capitalization Rate also referred to as cap rate, is the rental yield on a property. It is calculated as Total Rent divided by Purchase Price. In case you intend to rent the commercial property, the cap rate will give you an idea about the amount of return you can expect. The higher the cap rate, the better.
Another crucial element of real estate services is interiors and furnishing. This concept also comes into play when thinking about renting your commercial property. In India, usually, the commercial spaces that are rented or sold are bare and have no fit-outs installed by the owner. The tenant needs to install the lighting, air conditioning, fixtures, and furniture on his or her own. Fitting out a property will increase your costs, but you can also demand a higher rent for the property. Another thing to consider is that tenants who spend a lot of money fitting out the property, tend to occupy the property for longer periods of time.
In India, various Grades are used to describe the quality of the property. The higher the grade of the property, the higher the rent. But the property will also be more in demand and attract more clients.
A property’s grade can be A, B+, or B. The higher-rated properties will have a higher quality. This could include lifts, higher ceilings, views, etc. This is why these properties attract more clients. A client who rents or leases a higher rated property also tends to stay at that property for longer and pay higher rent as time goes on. Higher rated properties also have more value appreciation and are easier to resell.
Market Rent and In-place Rent
Market Rent and in-place Rent are important to consider only if you wish to rent out your property. This concept is an important aspect of real estate services used by investors to analyze how likely a tenant is to vacate the property when the lease is up for renewal. Market Rent is the currently trending rent in the area where the property is located. In-place rent is the rent that the tenant is currently playing. If the market rents escalate very fast, then they will be much higher than the in-place rent that the tenant is paying since the lease was signed before. In case the market takes a downturn, then the in-place rent will be higher than the market rent. Thus, ideally, a buyer should look for properties with lower in-person rent since this will mean that the tenant will be unlikely to vacate the property and would rather pay higher rent to continue to occupy the space.
For renting the property, another factor you will have to consider is the number of years to lease the property for. The common lease periods for commercial properties are 3+3+3 years or 5+5+5 years. This means that rent will escalate every 3 years or 5 years respectively. These leases ensure that the buyer cannot ask any tenant to leave so that he or she can rent the property to someone else, while the lease is active. Whereas a tenant is free to leave at any time after the lock-in period. Thus, these risks must be kept in mind when buying a property for renting. Longer lock-in periods is more beneficial for the buyer.
Availability of Amenities
Availability will increase the probability that the property will be rented or resold. Electricity and water connections are essential for businesses and offices to run. Without these connections, people might offer a lower price or reject the property entirely. Provisions for parking spaces and lift will increase the value of the property. The purpose for which the property is to be rented or sold must be understood, then it is easier to decide which amenities to add. Most modern workplaces rely on internet connectivity to run. Making provisions for the ability to add the internet will increase the value of the property. Commercial shops for sale will have different requirements.
The growth of your investment will depend on whether the property is rented or resold. Larger real estate spaces are better for long-term investment because over a long period of time their value can grow exponentially. While smaller properties might not fetch as much return in the future, they can start generating revenue in the form of rent almost immediately.
A buyer must conduct a thorough check on all documents related to the for sale commercial property. This is the minimum due diligence required before making such a large purchase. Checking the documents will include checking papers related to mortgage and transfer of ownership, in case the property has been sold multiple times before. In these cases taking the assistance of an agent or lawyer who is familiar with the requirements will be beneficial since he or she will be able to deduct if there are any hidden expenses or if there is anything wrong with the property papers.
Understand Market Drivers
Understanding the basic state of the economy is also important because it has a direct effect on the real estate market. An economic downturn will decrease the demand for property and property prices will fall and it will be harder to unload shops for sale in Kolkata. Announcements about the increase in interest will also dampen the demand for the property since rents will rise. Keeping a tab on government policies and market drivers is recommended. It will decrease the potential risks when you eventually buy the property. The ideal time to invest in a property is in a low-interest rate environment.
Investing in real estate services is one of the biggest decisions you will make. The market in India is complex with a host of things to consider. It involves a lot of technical jargon. Making a decision can be overwhelming. But, with the right amount of research and due diligence, one can make the best decision about which commercial property for sale to buy. We hope the above-mentioned points make your search easier.