5 Questions to Ask Yourself Before Investing in Commercial Real Estate

5 Questions to Ask Yourself Before Investing in Commercial Real Estate

  • David Passman
  • 03/22/22

You’ve worked hard, and now you want your money to work for you. Or maybe you’ve saved a little money and want to have it grow without putting in extra hours at the office. You’ve done your research, thought about how to invest, and have landed on commercial real estate.

Investing in real estate remains one of the most lucrative ways to invest your money, but a lot of your success will depend on where you choose to invest. When it comes to finding LA real estate that will bring a strong ROI, these are the five questions you should be asking yourself.

1. Why do you want to invest?

What’s the motivation behind your desire to invest? Perhaps you want to create cash flow through a new business or purchase a property that you can sell later for a profit. Maybe you want to diversify your current assets by including a commercial property or take advantage of the tax deductions on your qualified business income.

Investing in a commercial property is also one way to contribute to your family’s future. By purchasing a property now in a strong location, you can sell later at a higher price and put that money toward college tuition, weddings, or retirement.

Remember that you don’t have to go all-in on your own, either. Joining forces with one or two partners can ease the cost of investing while still providing you with a portion of any profits that come along. Just make sure you’re aware of how much your partners have invested themselves, what fees are involved and how exactly shares will be distributed.

2. What does the LA real estate market look like?

Though the real estate market dropped dramatically at the start of the COVID-19 pandemic, the overall impact since has not been as dire as experts expected. The market experienced a quick rebound once lockdown restrictions lifted and, over the past year, deals on office and retail properties have increased twofold. The key point to take away now is that the way people are using commercial spaces is shifting, and where they’re looking to live is changing, too.

Current market trends are favoring smaller, inland cities more than the usual urban and coastal hubs. Larger cities that are usually high-volume areas like LA and New York have seen a slight decline. People are looking to live, work and shop in places where they can feel more involved in their community. This means that when you’re looking at commercial real estate to buy, you might want to stick to the communities that are further inland.

3. Location matters for LA real estate

Speaking of the over 80 community areas within the city of Los Angeles, LA property values can depend largely on which community you choose to invest in. You want to know what kind of property you’re looking for (more on that in #4) and then which area of town is best to invest in.

Look for locations where there is a sustained commercial real estate demand. How have businesses, retail properties, or apartments been performing in the past five years? The pandemic has made commercial properties (particularly retail and office) seem fairly rocky, but as we’ve seen, those sectors are improving again. Consider whether people are moving to or from the city you have in mind. If the city hasn’t seen growth in a while, you may want to look elsewhere. As you research the smaller cities within Los Angeles County, keep tabs on trends in demographics.

4. What kind of property are you looking for?

Commercial real estate properties are primarily used for business purposes. However, you may be looking to invest in residential properties with at least five units (think apartment complexes) or start from the ground up by purchasing a vacant lot and building your own unit there. Warehouses and hotels are also options for those looking to invest in commercial real estate.

You want to have a firm grasp of the kind of commercial real estate investment you want to make. Are you hoping to start your own chain of restaurants and need a vacant spot to build from scratch? Or are you wanting to invest in an existing chain of hotels now that TSA checkpoint travel numbers are climbing again?

You may be okay with handling tenants, which would make apartment complexes a good fit. It all depends on your preferences and goals. But before you invest, make sure you know what you’re willing to get yourself into.

5. Do you know your exit strategy?

An exit strategy is a way to get out of an investment you’ve made. It’s important to think about your exit strategy because no investment is a guarantee of success. If you’re considering partnership investment opportunities that do not have clear options for the investors to exit, that’s a red flag.

Typically, you can talk through your plan with your partners as you’re working out a deal. Maybe you’re only interested in holding a portion of the property for five to 10 years. Then, you plan on selling your portion to a new investor once the property reaches a certain value. Or, you may hope to remain in the investment for 20-30 years because you’re confident that the property value will increase steadily.

No matter the strategy you go in with, be sure you’re investing with a partner or group that you trust.

Commercial real estate in Los Angeles is a worthwhile investment if you do your research and select the right location. Make sure you’ve honed your investment and exit strategies and know how much you’re willing to put into the property. Once you’re ready to take the first step and invest in LA real estate, get in touch with The Passman Group for expert guidance throughout the process.

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