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Investing In Commercial and Industrial Properties and Land

Published on Friday, October 30, 2015 by Land Century

Are you considering investing in a commercial or industrial property? Buy commercial and industrial real estate or land is far more complex than buying residential property. There’s a lot to consider, including the property’s net operating income, cap rate, and cash on cash metric.

Finding the right property doesn’t have to be an impossible feat. Here are some tips to help you along the way.

Search in Commercial Hotspots

Commercial properties in high-growth areas will offer the biggest return. While there are commercial hotspots all over the country, some of the most promising cities are Austin, Houston, San Francisco, Denver, and Dallas.

The energy industry is booming in Houston, and Austin has a strong industrial base. Denver has strong technology and energy sectors, while San Francisco is a top pick for hotel investments. The Dallas-Fort Worth area has high job growth, a diverse economy and a low cost-of-living.

Of course, you don’t have to search in the city specifically for your commercial or industrial property. But it’s best look in areas that are experiencing high growth. Be sure to perform a thorough evaluation of the neighborhood where the commercial or industrial property is located. Research the area, talk with the locals, visit the property during multiple times in the day to get an idea of the property’s potential.

Make Sure That You Have All the Right Information

There are a few basic pieces of information that you need to have when searching for property:

* Property type (multi-family, industrial, office, etc.)
* Location
* Price range

When you find a property that you’re interested in, you want to gather as much information as possible about it.

This includes:

* Taxes
* Price
* Who owns the property
* When the property was purchased by the previous owner
* How much they paid for the property
* Information related to the deed and title
* Who owns the mortgage
* Parcel information
* Any relevant building information

The more information you can gather about a property, the better. This data will help you determine whether or not the property is a good investment. For example, if the property has a building on it that was newly constructed, you can be fairly certain that the structure won’t need major repairs or renovations anytime in the near future. This will keep your maintenance costs low, and help you see a higher return.

If you’re simply buying vacant land for commercial or industrial purposes, it’s important to understand who the current owner of the property is and how much they paid for the land. If they’re selling the land for a much higher price than they purchased it for, this may be a sign that demand is growing in the area and could signal a good investment opportunity.

Look for Sellers That Are Highly Motivated

While they’re not always easy to find, motivated sellers are often eager to sell their property below market value. You wind up with a great deal, to get the property off their hands. Motivated sellers are the key to landing a great deal on commercial or industrial properties. Why? Because only a motivated seller will be willing to negotiate on the price. Sellers who aren’t interested in a quick sale will be harder to cut a deal with, and may not be worth your time.

Use a Variety of Sources to Search for Properties

When searching for properties, don’t just stick to one resource. Be adaptable. Use online property portals, and check the classified ads in local newspapers. Work with a real estate bird-dog to help you find a valuable investment lead. These individuals will provide expertise in exchange for a referral fee.

Know the Local Market

It’s crucial to have a very clear understanding of the local market before making an offer on a commercial or industrial property. Is there a high demand for the type of space you plan on developing (be it retail, office, warehouse, and/or industrial)?

Remember, vacant land is typically vacant for a reason. This doesn’t mean that the can land is a bad investment, but it’s important to truly understand local demand before committing purchasing and developing the property.

Evaluate the Property

When deciding whether to invest in a commercial or industrial property, it’s important to thoroughly evaluate the property beforehand.

This means looking at the property’s:

* Cash on cash return
* Capitalization rate
* Debt coverage ratio
* Depreciation
* After-tax IRR, etc.

The capitalization rate of the property is one of the most important factors because this ratio estimates the property's income-producing value. Cap rates will vary depending on the city's location, demand, crime levels, and other factors will affect the property’s ability to produce income.

Perform Your Due Diligence

Once you’ve found a property that you’re interested in and are ready to make an offer, you’ll need to ensure that you perform your due diligence.

This includes:

Zoning: Check the surrounding area to make sure that it’s not zoned differently.

Utilities: Check to make sure that the property includes all necessary utilities. Properties in rural areas may not have easy access to electricity, water, or sewer.

Easements: Who will have access to the property? Location of any easements on the property will affect where you can build your commercial structure.

Environmental Hazards: Have a Phase I Environmental Site Assessment performed, which will include a site investigation, a review of the properties uses, and a review of the public records of the property.

Survey: Hire an experienced survey company to locate all the property lines. A complete survey will show any easements and encroachments on the property.

Title Check: Make sure that you work with a reputable title company. The company will perform research to ensure that the property has no liens and that the seller has the right to sell the property.

Investing in commercial and industrial property can be a complex endeavor. For this reason, it’s best to work with a qualified and experienced real estate adviser who has experience with commercial property, and to find a reputable real estate lawyer to assist with the transaction.
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