For many investors, moving from residential to commercial real estate in Birmingham is the next logical step. It can be an extremely lucrative investment depending on the type, location, and your tenants. Learn some of our best tips on how to make the jump in our latest post!
Commercial real estate can be very profitable when the right tenants are found. The returns can be high with the maintenance low. While an investor with residential experience will be able to navigate the process, there are some things we think you should know before buying commercial real estate in Birmingham or the surrounding areas.
Understand Your Costs
Financially, there are a number of things to consider when making a commercial property investment. You will face different expenses than you do with a single-family property.
- Insurance costs – When buying a commercial property in Birmingham, you’ll want to factor in insurance costs. Depending on the building, the coverage, and the location your premium could be as low as $500 per year or up to several thousand per year! Get some quotes beforehand so you aren’t surprised by the premiums down the road. Insurance isn’t something you want to avoid or gloss over. Having a solid policy in place will protect you in the long run!
- Turnover – Just like a residential property, tenant turnover will cost you big! You will need to advertise, screen tenants, and possibly enlist the services of an agent. You should do background and credit checks to ensure your tenant is going to be able to cover their rent each month. There are many services that can run these reports for you with little cost.
- Repairs – Your repairs will be a bit different. Depending on the size of the building, things like air conditioner repairs and painting can cost much more than a residential property. However, if you own one commercial building with 10 tenants, for example, you can make some repairs all at once. A new roof will help all parties. While reroofing 10 houses will cost quite a bit more.
- Taxes – You can always count on taxes right? When you own a commercial property, you will be subject to property taxes. Luckily you will be able to deduct these taxes come tax time. You will also have to pay taxes on the income you receive from the commercial property. You will also be subject to state and local taxes in some parts of the country.
Understand Your Tenants
Many people like the idea of a commercial investment because the relationship with their tenant is typically much more professional. Rent is usually paid on time and defects and repairs are usually brought to the light faster than with a residential rental. If your tenants will have clients coming to the building, they will want things to remain in tip-top shape. Before making your purchase, take a look at what sort of tenants your building will attract. What’s nearby? What sort of competition will your tenants have in the area? You want to learn as much as the area and the market as possible so you can choose a commercial property investment in Birmingham that will secure a long-term, respectful tenant.
Get Your Financing Squared Away
You aren’t going to be taking out a simple FHA loan to fund your property this time around. You need to have the cash available to buy outright or you need to be pre-approved for a commercial loan to buy the property. You don’t want to find yourself in a place where the perfect property hits the market, but you lack the cash to buy it. By getting approved before you start looking, you’ll know exactly what you’ll be able to afford. Many times, when people are first making commercial property investments, they will work with a partner in order to more easily finance the deal.
Work With A Mentor
Working with someone who has been down the road you are on will help you grow as an investor in many ways. You will be able to learn the ins and out of the business as well as gain valuable insight into the local area market. At Alabama Real Estate Deals, we work with individuals who want to invest in Birmingham real estate. Building a strong, varied, and profitable portfolio is simple when you know what to look for! The right mentor will help you avoid many of the mistakes investors often face. You can also consider partnering on your first few deals to ensure you have the hang of things and to lower your overall risk. Nothing beats learning the business first-hand. Working with the right mentor will allow you to learn things you won’t find in books, or even in blog posts.