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Variables to Consider When Assessing a Commercial Real Estate Investment

By Karyn Stroet

When evaluating a potential commercial property investment, the most important consideration is the return on investment (ROI). This metric represents the potential profitability of income-generating assets and is a key tool for comparing different investment opportunities. A higher ROI means that the returns you will receive from an investment property are favourable when compared to its cost. As an investor, accurately calculating potential profits before acquiring a property is crucial to maximising your chances of success.

Key considerations before purchasing any investment asset include:

Rental Income

One of the main benefits of commercial property investing is the potential for immediate income through tenant rental payments. If the property you’re considering comes with existing tenants, it’s essential to consider several variables in their leases to determine if it’s a suitable investment. These include:

  • the amount of time left on a tenant’s lease – is their lease about to expire/how likely are they to renew?
  • the financial security of the tenant – are they credit-worthy/will they stay in business?
  • How much space do they occupy relative to the building’s total size – what risk are you exposed to if that tenant leaves?

Operating Expenses

Operating expenses are another crucial factor to consider.  Utilities, maintenance, property taxes, and insurance are common expenses associated with owning a commercial investment property.  It’s important to have a thorough understanding of a property’s operating expenses and how they compare to the total rental income.

Asset Appreciation

Another reason savvy investors are drawn to commercial real estate is for its potential to appreciate over time. Key indicators, such as suburb growth, infrastructure improvements, population growth, economic growth, and industry diversity, have historically been crucial factors driving property value increase (or decrease) over time.

Capital Expenditure

It’s important to consider the capital expenditures that may be necessary after your initial investment. To ensure your property appreciates over time, you may need to invest in updates and renovations in addition to on-going maintenance and repairs. While capital expenditure can be costly in the short-term, it can substantially increase the potential for appreciation in the long run.

Is it a Good Investment?

After considering all of these variables and calculating your potential ROI, you’ll be well-positioned to determine if an investment is worthwhile.

When you’ve decided on the right commercial investment for you, it’s wise to engage the services of professional Property Managers to maximise the performance of your asset.  The award-winning team at Ray White Commercial Bayside handle all aspects of commercial property management, including marketing to find new tenants, preparing and reviewing lease agreements, conducting regular inspections, managing repairs and maintenance, and collecting/disbursing rental income.

Contact us today to see how we can help you achieve your commercial property goals.

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