If you want to know where the money is in the Phoenix real estate, look no further than the commercial market. Through November 2018, year-to-date sales of office, retail, and industrial properties totaled $4.6 billion. Investors have benefited from rising prices and solid rental income margins.
Phoenix continues to grow, and along with that growth comes the demand that is making commercial real estate so profitable. Wise investors are entering the Phoenix commercial real estate market every day. If you are new to this topic and wonder how to invest in commercial real estate, Phoenix offers plenty of opportunities to get your feet wet.
Demand is healthy, and economic activity remains on the upswing. Despite the good economy, Phoenix commercial real estate prices haven’t blown through the stratosphere like many Western cities. If you are looking for a profitable commercial real estate investment at a sane price, Phoenix is a great market to enter.
What are the advantages of investing in commercial real estate?
There are many benefits of a commercial real estate investment. Some of them include the following:
- Commercial real estate returns on purchase price average between 6 and 12 percent. Residential real estate averages just 1 to 4 percent.
- In the long term, commercial real estate returns more than keep pace with the stock market, and that’s before factoring in leverage. When leverage is factored in, it magnifies a 6 to 12 percent return out of the stock market’s league.
- Most commercial real estate can be purchased with very little or none of the investor’s money. The more leverage, the higher the rate of return. For commercial real estate leverage to be effective, the return on the property must exceed the interest rate.
- If an investor who borrows at 4 percent and produces a 9 percent return retains the 5 percent spread. In addition, leverage allows you to close more deals faster. When you do these deals right, real wealth accumulates quickly.
- Commercial properties are occupied by businesses that have a stake in the property looking good. They become your allies in improving the property. When purchasing a commercial property, objective pricing evaluation comes from the owner’s income statement. The price should always allow the purchaser to earn the area’s prevailing cap rate.
- Returns are further boosted by triple net leases. These leases are written so that the tenant pays the expenses beyond the mortgage, such as taxes and utilities. Triple net leases let leveraged investors keep more of the spread.
The downside of investing in commercial real estate
Commercial real estate isn’t for everyone. Like all investments, it has risks. Here are some of them:
- The leverage that makes the returns so high on the upside also works in reverse. A shock to the market can quickly wipe out a highly leveraged investor’s down payment.
- The investor must also worry about keeping the property’s income above the cost of his or her loan. If the property loses too many tenants or rents fall drastically, negative cash flow can weigh down the investor’s portfolio every month. Investors should know the downside risk of any investment and be sure they can weather a market downturn.
- Potential maintenance costs for commercial real estate are larger than residential. For this reason, a reserve for maintenance needs is vital.
- Legal risks are also increased over residential real estate. For example, shopping centers are much more likely to have people fall or be struck by vehicles on the premises. In addition, workers can suffer accidents.
- Any place with public access presents an increased risk for criminal activity. Security is always a consideration with commercial properties.
- Unlike stocks and bonds, real estate can’t be converted into cash quickly.
Commercial real estate never works as a short-term investment. However, it provides a stable cash flow you can’t get in the equity markets, and that cash flow far exceeds what’s available in the bond market. If you are able to buy and hold for the long term, then commercial real estate offers opportunity.
How do you get started in commercial real estate?
Commercial real estate consists of all real properties used to generate profit. Take a minute to think of all the properties in greater Phoenix that are used commercially. Commercial real estate offers opportunities of many shapes and sizes, such as the following:
- Medical centers
- Strip malls
- Industrial facilities
- Car washes
- Parking garages
Commercial real estate investors see opportunity everywhere. The trick lies in picking the right ones.
LCI Realty Phoenix-Mesa Arizona
LCI Realty is a full-service property management brokerage. Our professionals help our clients select, manage, and sell properties for maximum return. We understand that our client’s success depends on critical decisions at each stage of the process, such as purchase negotiations, marketing, leasing, expense management, improvements, maintenance, and sale negotiations. At each phase, LCI maximizes returns on behalf of our investors.
To discuss getting started in commercial real estate, contact LCI Realty. Read below for a detailed understanding of what we do, and why LCI’s full-service property management services are so valuable to our customers.
How LCI Realty boosts investor returns
We start with education. Our clients are very smart people with experience in other fields. They are often starting out in Phoenix commercial real estate and have many questions. We live and breathe this business and enlighten our clients so they understand the do’s and don’ts of Phoenix commercial real estate.
LCI Realty benefits our clients in property selection because we have our boots on the sand in Phoenix. As a property management brokerage, we are plugged into the local market. Our people know the good properties and the available properties.
Once we meet our clients and understand their needs and goals, we quickly find a matching property. Our professional negotiators assist in making the acquisition, and we see to the many details, such as evaluating investment potential, lease and title review, vendor evaluations, cash flow modeling, and inspections.
Commercial properties need active management
A thriving commercial property needs constant attention. Part of our job is maximizing cash flow and increasing the property value. Our managers develop strategies to accomplish these goals and handle the day-to-day operations.
Here are some of the important commercial property management tasks:
Monthly and quarterly statements must comply with GAAP.
A manager oversees design, planning and vendor- and material selection. This applies to both property capital projects and tenant improvements.
We analyze expenses and find ways to save.
Insurance and administrative compliance
GAAP and Sarbanes-Oxley compliance standards must be met.
We provide tenants with an immediate response; we coordinate maintenance work and communicate with our clients. Our people also practice proactive maintenance, which prevents large repair bills down the line.
Commercial tenant screening qualifies tenants based on ability to pay and whether they benefit the property. For example, we find tenants that increase foot traffic for retail properties. This makes the property more valuable and ensures tenants want to stay.
When it comes time to sell, we leverage our connections with landlords in the Phoenix real estate market to produce qualified buyers and get the deal done.
The Valley of the Sun is a bright place for commercial real estate investment. LCI Realty provides our clients with the education they need to succeed in this market. We understand the potential of commercial real estate properties and how to maximize returns.
For more information about the greater Phoenix commercial real estate market, contact LCI Realty.