When searching for a commercial investment what makes a good location?
Often when I am checking out an area I will visit several times – at different times of the day and different times of the week. This is especially the case I’m looking at a retail investment. To an extent a retail investment say a cafe or a hair salon relies on passing trade, this can be both foot and car traffic.
If an area has a few cafes and the normal service type shops ie hot bread shop, newsagent, bottle shop, hair salon, real estate agent. It is most likely to be surrounded by residential development, in fact you often see residential developments for sale , say, a new block of apartments quoting the fact that they are near a “cafe precinct”.
The two go hand-in-hand. I love areas to invest that have a shopping strip surrounded by residential development, a quick check of the zoning of the area around and often you will find that there is no more land zoned for commercial business. This is obviously a great sign as there can be lower vacancy rates in the shopping strip. Everything in business is driven by supply and the demand, commercial property is no exception. The effect of this can be a lower capitalisation rate for any properties on offer ie:a lower rate of return is expected by the buyers, this means a higher sale price for the vendors.
Recently a shop and apartment above sold in Bondi Road at a cap rate of around 4%, this means that the person buying be getting only 4% on his investment in the building. Not a great return I hear you say, but this could be increased by any number of methods for example letting the apartment out as a service letting.
It’s all fairly simple really – the most likely have been driving through or shopping at a shopping/dining area for years without noticing that there are hardly any vacancies. The trick is to buy into these areas and unlock the potential cash flow that will make it positive cash flow for you. There are a slightly different set of rules for industrial commercial investments. Often it is a balance of industrial tenant types that makes for a great industrial area. Of course ,all normal precautions must be taken here as well – By thoroughly investigating the area, the tenant, the lease and the building itself.
If you start by checking out the same type of properties you will quickly become familar in any special differences that that type of property may have. For example I like buildings with cafes in them because they are a “live” tenant meaning they bring people into the business every day. Because I have had several cafe tenants in my portfolio I know what to look for when I’m checking out a building that has an existing cafe or is a potential space for a cafe or restaurant. Once you start looking your knowledge will grow quickly I suggest you get out and start having a look around now.
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