When Is the Best Time to Invest in Commercial and Industrial Property?

Most of us are familiar with residential real estate, and what it means to invest in it, but not all of us know much about commercial property.

Commercial property is built and used for business purposes. You also need to become familiar with Industrial real estate.

Industrial real estate is a type of commercial property that is extremely important. Industrial property is used for industrial purposes. It sounds simple, but it comes in all shapes and sizes and covers a huge range of business types. For first time or experienced investors, there are a few things to consider before you embark upon your investment.

  1. Types of Commercial Property: You will first need to determine the type of property you want such as leisure, retail, office, industrial, healthcare, or multifamily. Leisure properties are places that people will come to spend a lot of time, this include hotels, public houses, restaurants, café’s, and sports facilities. Retail properties are places that people will come to shop, this includes retail stores, shopping malls, and other types of shops. Office properties are where people will come to work, such as office buildings and serviced offices. Industrial properties are built and used solely for business purposes such as, office/warehouses, and garage distribution centers. Healthcare properties are where people will come to be taken care of such as, medical centers, hospitals, and nursing homes. Multi-family properties are apartments meant to house family members.
  1. The Location: This is arguably one of the most important aspects in your decision making. Pre- determining your location will help shape your future decisions but you should approach this with the same intention as you would residential property; it must have the potential to be rented out and/or sold at a profit. For instance, one of the best places to invest in real estate is Denver. Denver doesn’t receive a lot of attention, but the city is actually a hidden gem.
  1. Rental Income: Location influences the rental potential of the property.
  1. Property Tax: The percent of property tax is also based on your location. Providence County has tax rates above the state average. The county’s average effective property tax rate is 1.65%, as compared with the state average of 1.55%
  1. Mortgage Loans: Most banks provide up to 80% loan of the property value with a payback period of anywhere between 15 to 20 years. This is because you should pick the best location for you depending on your budget and rental yield as there is a strong possibility that your rental income may not be able to cover the mortgage in the initial period. However, if your property is in a good location, it is possible to command a higher rental yield to bridge the gap quicker.
  1. Additional Costs: All other cost affiliated but not related to obtaining the property should also be taken into consideration. Such costs are incurred but not limited to maintenance and renovation fees. As owner of the property, you are responsible for the daily upkeep and work ability of the property. In order to churn a profit and keep a steady income, you will need to maintain your investment in the best condition.

As a real estate investor, the most important question is “when is the best time to buy?”

There are four phases of the commercial real estate cycle: Recession, Recovery, Expansion, and contraction.

  • Recession: The Recession Phase follows a market contraction, when the availability of financing become scarce or expensive and property prices have fallen. Properties experience higher vacancies and owners have difficulty refinancing, selling or leasing. Foreclosures increase and property sellers become motivated. Prices can fall below replacement costs, resulting in many opportunities for those with the liquidity and fortitude to take advantage of the market weakness. This is the absolute best time to buy.
  • Recovery: In the Recovery Phase, the market is improving and prices begin to recover, although some buyers are still hesitant to proceed. More tenants enter the market and property owners refinance as affordable financing becomes available. Owners tend to improve their property and work to maximize rental rates. Prices are increasing. This is a very good time to buy.
  • Expansion: During the Expansion Phase, the real estate market is progressing and expanding and equity investors are plentiful. Financing is readily available and the price of real estate may increase more than seen in previous history. Vacancies are at their lowest point and there is a general sense of well-being, prosperity and abundance. Everyone is talking about buying real estate. This is the time to sell.
  • Contraction: The Contraction Phase is when vacancies are increasing and prices begin to fall from the peaks of the Expansion Phase. The market has become oversaturated and financing is becoming more difficult or expensive. Investors begin to withdraw from the market as vacancy and delinquency rates rise and prices decline. Buying and selling decisions should be based on need, prime property availability and specific sub-market and individual opportunities.

The phases of the real estate cycle are always in the same order; the only variables are the depth and duration of each phase. By determining the timing of phases along with your own personal and business capability and goals, you can make the best decisions.

“Our Experience is your advantage”

Contact Alex Biliouris at (401) 352-4607 today!

 

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