How to Identify A Profitable Commercial Property

Once you’ve begun investing in real estate, you’ll start noticing opportunities everywhere you look. When you visit the dentist, you may find yourself assessing the potential of medical office space. Your commute turns into an opportunity to evaluate land, multifamily housing, warehouses, and retail shopping locations—all to determine which real estate investments appeal most to you.

As you continue to explore your options, you want to ensure that you find properties that are appealing AND that have the highest probability of becoming a profitable endeavor.

We’ve put together some guidelines to help you assess properties and determine which ones might have strong potential for good returns, with a focus on location, operating costs, and future development opportunities.

 Location

Location is critical to any real estate investment. When you’re evaluating a property, do a deep dive into the surrounding area/neighborhood. You can suss out potential red flags by figuring out:

 Why is the property for sale?

What made the previous owner/tenant decide to move on? If it’s because they grew and needed more space, that might be a good thing and might show that the area is healthy and growing. If they moved because rents went up and they couldn’t cover expenses, keep digging to learn more about their business model and whether the same issues might impact your investment or your future tenants.

Is there a high vacancy rate?

A high vacancy rate can make rent/lease prices drop because there’s so much empty square footage available. As the property investor, those lower rental/lease rates directly impact your bottom line.

 What’s the surrounding community like?

Inquire about traffic counts, walkability, and safety. For your investment property to be appealing to potential tenants, you need to be able to show that the area can pull in the target tenant demographic wanted.

 What are the average cap rates?

You want to ensure you have good potential for return on your investment. Seeing cap rates from other properties in the area can give you an idea of what you might stand to earn from your property.

Operating Costs

A profitable real estate investment comes down to the money you can make on your property and how much of that money you can keep. Two important factors to consider are:

 Which factors will affect your net operating income?

To calculate your net operating income, you determine the revenue generated from the property then subtract your operating expenses. Higher revenues and lower expenses mean a better net operating income and a better potential for turning a profit.

To evaluate your net operating income, consider the following:

• How much can you charge or aim to charge when renting the property?
• What are surrounding properties charging?
• What are your projected expenses?

As you crunch these numbers, figure out whether you can make money on your investment and how much time, effort, and bandwidth it will take you to turn that profit.\

 How much are average property taxes?

Commercial property taxes are calculated differently residential, and assessors take a variety of information into consideration, including:

 The price of comparable pieces of property sold recently

Improvements made to the property

The property’s earning power (sometimes including earning potential)

Assessing current property tax rates is important, so you understand how they might affect your overall property budget and net income. Even more importantly, assess how property taxes are trending. Are they going up, indicating that value in the market is increasing, or are they trending down, indicating that prices in the area may be decreasing and properties devaluing over time?

Future Development

Experts project that 68 percent of the world’s population will move to urban areas by 2050. That means that in some cities, new developments will likely continue to rise as population centers shift. That doesn’t mean you should rule out suburban or rural areas.

Instead, focus on the development in question and whether there’s a plan for continued growth and increased profit. Where are they in the building process? Are they ramping up new areas of construction or is the project winding down?

 Final Thoughts

Does this evaluation sound like a lot of work? That’s because it is. Many investors turn to an investment syndicate as a partner when seeking profitable real estate investment opportunities. Sponsors know their markets and where to get the data needed to evaluate a property and determine its earning potential.

 Saint Investment Group is leading a new era of real estate investing through proprietary analysis, technology, and access to off-market deal flow. Here is how you can join the movement.