Investing in Southern California commercial real estate can be an excellent way to diversify an existing portfolio, launch a successful real estate career, or embark on an investment journey that includes building passive income and establishing wealth.
Any investor’s success, however, depends on choosing the right property to buy and rent out to tenants who are looking for the ideal space from which to run their own business.
This can be a more difficult task than you imagine. Choosing the right commercial property requires a few key considerations. With so many variables to consider, it's easy to feel overwhelmed and even to second-guess the acquisition of a property that might have seemed just right.
If you’re not sure where to start, we can help you. At Bell Properties, we work with commercial investors to identify and negotiate the best commercial property for them. This will depend on your investment goals and what you’re hoping to do with the space you buy.
Here’s our easy on how the factors you need to consider when choosing the right commercial property to buy and rent out to tenants.
Look for Location When Investing in Commercial Real Estate
As with any real estate discussion, the most important thing to talk about is location.
This is obviously going to be an essential factor to consider when choosing a commercial property to invest in. Location will drive just about everything else.
You want to choose a property that is located in an area with high demand for commercial space. Some things to look out for include:
A high population density
Proximity to public transportation
A growing economy
Availability of parking spaces
Proximity to other businesses
The location that’s going to work best for you will, of course, depend on the type of commercial space you’re interested in buying. When you want a retail space, the location needs to be visible and easily accessed by shoppers. Parking will be a big deal. If there’s a nearby coffee spot, that’s even better. Your retail tenants will look for space that’s likely to attract a large population of potential customers in the area. When you’re buying storefronts, you’ll want the space to be in an area that’s walkable and close to other shops.
Office space has its own location requirements. If you’re going to rent out office space, you’ll likely be trying to attract tenants who have workers who drive into Los Angeles or other cities throughout Southern California. You’ll need to consider parking. Are there public garages nearby or does the space you’re thinking about buying come with its own parking?
Some commercial property will not have to worry about traffic and visibility quite as much. As an investor, perhaps you envision buying up industrial space that could be used as a data center or a warehouse. In this case, proximity to population centers and foot traffic matters very little.
The location you choose will depend on the investment property type and the target tenants. Just know that you have to consider location when you’re choosing the right commercial investment. This is almost always the most important factor in any good decision.
Who Are Your Commercial Neighbors and What Do They do?
Your commercial space must also consider the adjacent and even adjoining commercial spaces.
Who are your neighbors? What types of businesses do they run? Are they likely to be competitors for your tenants, or likely connections?
Your tenants will be looking for neighbors who complement what they do, but they won’t want competitors. If you’re buying space that you expect restaurants might want to rent, for example, choose a neighborhood with a string of successful restaurants, but look for tenants that aren’t already represented. You can’t convince a pizza place to move in if the neighbors are another pizza place and an Italian restaurant, for example.
Remember that there are shifts and tenants tend to come and go, even in commercial spaces. The neighborhood won’t always stay the same, and neither will its population. Get to know how the local economy moves and pay attention to new stores, offices, restaurants, and other commercial enterprises that are opening in the area before you buy.
Think about what’s around you when you’re buying. Health-care professionals who are looking to rent office space for a medical practice will always want to be close to hospitals or labs. If you’re buying space that you expect will rent out to dance studios, gyms or fitness clubs, don’t buy space next to the largest chain gym in the city.
Size and Southern California Commercial Property Management Features and Functions
Size matters. You might be choosing the right property but the wrong size. Think about exactly what you need and how it should look. Do you want a single-floor or an entire multi-level building? Are you looking for an entire complex or just one or two storefronts?
Consider your minimum and maximum space requirements before you begin looking for a profitable commercial space. As you establish these parameters, consider the tenants you’re hoping to attract as well. They may be moving because their space is too large or small. How can you adjust what you have to fit their needs?
There is total square footage and then there is usable space. They are not the same. Usable space is profitable space. A lot of extra square footage that won’t be usable is not worth paying for. You may have common areas like lobbies and lots, but when you’re choosing a commercial space, you need to think about how much of that space can be rented out and turned into income.
Think about your ideal tenants. If they begin to grow and need more space, will you be able to accommodate that need? If you can’t, they may have to look for space elsewhere. Give yourself some room to grow so you can let your best tenants grow with you.
The inside of the building matters, too. You can do whatever renovations you need, but it’s necessary to have a solid starting point. Office buildings will need conference rooms and maybe cubicles. Retail shops will want to carve out dressing rooms or storage space for their inventory. Think about those ideal tenants you’re hoping to attract.
What kind of technology will you be able to offer in the building that you buy? The right property will enable you to provide whatever internet, cable, and security features your tenants are likely to tell you they need.
Be Rigorous with Your Due Diligence
The right commercial property starts with your investment goals.
Work with a good Southern California commercial property management partner who understands those investment goals as well as your criteria. A local company like Bell Properties can help you locate investments that serve your needs. Don’t jump at a deal that looks too good to be true. The opportunity has to meet the needs of your portfolio and satisfy your investment goals. If you’re looking for an office building, don’t get distracted by some prime retail space.
Work with a commercial property manager who knows the local market, whether you’re looking inside of Los Angeles or outside of the city. Your Southern California commercial property management partner can help you understand what kind of tenants you’re likely to attract, how much rent you can collect, and what you can expect to spend on maintenance and upkeep.
Do your due diligence before you make an offer on a commercial property, and prepare to negotiate. Your broker and management company can certainly help with some of this, but you want to know enough about the market and what you might be getting to make smart decisions.
Here are some of the things you’ll want to ask your property manager and your real estate agent or broker before you decide to make an offer on a particular space you’ve identified as a good possibility:
What is the property being used for now?
If the property is occupied with tenants now, will they stay? If so, review rental amounts and lease agreements.
What are the zoning laws and restrictions? Are there types of businesses that will be prohibited?
How much rental income is being earned now? Is this competitive with other properties? Sometimes, you can see a rent roll before you buy. If the current owner isn’t willing to do that or it’s difficult to get an answer on what the space actually earns, you should be suspicious.
How much are the property taxes annually or quarterly?
Evaluate the property and building condition. There may be repairs that are needed right now. Is this why the seller is selling? Invest in an inspection and get to know vacancy and turnover rates for the local area.
Commercial property investments require these specific considerations, and many others, depending on your investment goals and strategy. While we’re always happy to provide general advice like this, it’s better if we can steer our discussion towards your unique needs. Contact us at Bell Properties Commercial Real Estate to talk about the Southern California commercial property management questions you have before you buy.
