7 Tips in Evaluating Commercial Real Estate Investments

Are you planning on purchasing Charlotte, NC, investment properties? If you want your properties to succeed, you must first assess them well.

When you’re evaluating commercial real estate, you need to use different strategies than you would for residential properties. You need to determine financing and documentation as well. 

It pays to be ahead of the office / retail property trends. Evaluating them according to the type of lease is also beneficial.

As for industrial property, it’s wise to look at the design and market data.

Regardless of what commercial property you’re hoping to buy, it’s always good to seek an expert real estate agent.

Let’s explore these tips below.

1. It’s Not the Same as Evaluating Residential Real Estate

While commercial and residential plots are both real estate, they’re evaluated differently by market experts. 

A top real estate agent will look at two essential things when it comes to Charlotte, NC homes. These are square footage and the sales of comparable properties in the area. 

As for commercial real estate, different metrics are required. To be exact, you’ll need a set of comps (comparisons).

How Do You Evaluate a Commercial Real Estate Purchase?

Agents often compare commercial real estate with a similar property’s capitalization rate (cap rate). This is obtained by dividing the sale price by its net operating income.

You can view this as the property’s annual rate of return.  

Apart from the cap rate, agents (such as Showcase Realty agents) will also use these valuation methods:

Net Operating Income

This is the income amount the property brings in after all the expenses (such as vacancy and loss) are paid. Likewise, it should be calculated before mortgage payment. Also known as the NOI, it is used to establish the cap rate. 

Cash Flow

This is the money you’ll get after paying the expenses AND mortgage.

Cash-on-Cash Return

You can get this by dividing the cash you paid for the property by the cash flow it produces annually. This percentage is often used to calculate your return on investment.

Gross Income

This is the income you get before expenses. 

2. You Need to Know More Than Just Numbers

Knowing the figures mentioned above is essential, but that’s not all there is. If you want to make the most of your Charlotte, NC investment property, then you need to understand these factors as well:

Financing

Your property must satisfy the bank’s appraisal processes if you need financing. 

This, too, is evaluated differently from residential real estate. The bank will assess the property according to its features. As the owner-operator, you will assume the personal guarantor role. 

In other words, it’s not just your property that needs to be good. Your financial records should be impressive too. 

Tip: If you’re investing in a multi-family property with less than four units, make sure to live in one unit. This will qualify you for owner-occupied financing. It’s better for investors since it has lower interest rates and down payment requirements.

Documentation

You’ll want to get your hands on all the necessary documents as a commercial property investor. Apart from the title, you’ll also need the following:

• A rent roll of current tenants
• Service contracts
• Maintenance records
• Income and expense statements for the past few years
• Proof of payments in the form of Estoppel certificates

3. Be in the Know

When it comes to Charlotte office/retail properties, it pays to be a step ahead of the trends. 

These properties are price-sensitive since they are affected by economic recessions. An economic downturn could mean a considerable loss of income on your part.

To keep abreast of the industry news, you need to:

Subscribe to Reports

Make sure to read Deloitte’s Retail Industry Outlook report. I, Nancy Braun, owner of Showcase Realty, also recommend looking at the data from JLL’s Office Outlook. 

These reports will do more than just inform you of the asset class. It will also help you learn how to attract new tenants (and retain the current ones.)

Network

Talk to as many brokers, business owners, and tenants as possible. This will help you understand what’s in high demand nowadays. That way, you can set your sights on the investment property that’ll help you make the most money. 

You can also check out our blog here to learn about the negotiation strategies in real estate.

Commercial rentals are negotiable. A lot depends on your tenants and the lease they make. It’s one of the things you need to consider when you’re evaluating investment properties. 

You may bump up the cost in the future, but this could mean losses on your part.

So before you invest in retail space, you need to evaluate it according to the proper lease structure. 

Bigger properties work well with a triple net. This is where tenants pay for the lease, property taxes, insurance, and utilities. 

If you’re eyeing a small, shared property, you may want to consider a modified gross lease. This requires the tenant to pay the rent, taxes, and utilities, but not maintenance. 

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5. Read the Zoning and Land Use Laws

Say you have considered all the evaluation tips above. Before you sign the deal, there are two things you need to read up on: the area’s zoning and land use. These details are crucial if you plan to expand or modify the property.

For example, the building may allow convenience stores but not pet stores. Essentially, you’re losing one type of tenant with this one.

While you can always apply for a notable exception, it’s often difficult and expensive to get. 

You might also find you’ll need to make building improvements. These may require pricey additions such as sprinklers or elevators. 

Knowing what’s allowed and not from the get-go will absolutely save you from making costly decisions. 

6. Check the Property’s Design and Market Data

Did you know that industrial real estate has the lowest vacancy rates?

According to experts, it only averages at 5%, thanks to the high demand for E-Commerce warehouses. 

When buying Charlotte, NC, industrial properties, you must assess them carefully.

How Do You Evaluate Industrial Property?

If you want to make significant profits from your properties, then you need to look at these two things:

Property Design

Industrial real estate comes in all shapes and sizes. These, of course, will affect the building usage and tenant type. 

Market Data

Industrial property - although popular - is not safe from economic fluctuations. So before you buy one, make sure to consider the following:

• The labor market
• The property’s proximity  to ports or urban centers
• Average vacancy rate
• Lease terms, rental rates, and maintenance or construction costs

7. Hire the Best Real Estate Agent in Charlotte, NC

Brokers either specialize in residential or commercial properties. Needless to say, you’ll want someone who specializes in the latter. 

Regarding investment properties, you’re best off with Showcase Realty. Our agents are well-versed with the numbers and know how to negotiate commercial deals.

The team, led by me, real estate veteran Nancy Braun, has served residential and commercial investors in NC for over 24 years. With my impressive record, I can help you land the investment property of your dreams.

Visit https://showcaserealty.net/navigating-the-charlotte-nc-real-estate-market-with-nancy-braun/ to explore expert insights from Nancy Braun and learn how to make smarter investment decisions in this dynamic market. 

Conclusion

There you have the tips you need for evaluating commercial real estate investments. If you have questions or concerns, you can always seek the help of the Showcase Realty team of real estate experts. Call or text us now at (704) 741-8157.