Commercial real estate investing in Canada can be a rewarding and exciting experience. Whether you are trying to transition from residential to commercial real estate investments or simply diversify your portfolio, you may be interested in learning more about commercial real estate and its potential return on investment.
It’s easy to feel overwhelmed while looking for commercial real estate investment prospects or writing a business plan, but having the correct information may make the process go more smoothly.
Types of Commercial Real Estate to Invest in Canada
You can invest in many different sorts of commercial properties. Apartment complexes, workplaces, shopping malls, plazas, and recreation centres are all examples. Commercial properties include industrial structures (such as warehouses and distribution centres) and multi-unit residential homes that are leased for profit.
Is Your Commercial Property a Good Investment?
There are numerous aspects to consider while looking at commercial properties. However, your ultimate goal should be to find a house that meets both your needs and your investment objectives.
One thing to think about is the type of building you’re buying. Examine the demographics of the area to see what types of businesses will produce the most demand. A healthcare centre in an area with a significant senior population, for example, is likely to be more profitable than one in a younger area.
It’s also a good idea to think about industry trends when analyzing a property’s profitability. Since the outbreak of the pandemic, demand for industrial real estates such as warehouses and distribution facilities has risen dramatically. Finding a property that can support a thriving business ensures you, the investor, a steady income flow.
The capitalization rate is a quick calculation you may use to estimate the profitability of your investment (cap rate). A cap rate is calculated by dividing the asking price by the annual net rent. Cap rates will vary depending on the market. A low cap rate in downtown Toronto indicates that the cash flow is smaller than the purchase price.
A greater cap rate indicates that the cash flow is more substantial in relation to the purchase price in a tertiary market. Many investors who engage in lower cap rate investments rely on asset appreciation to compensate for the reduced annual cash flow.
If you’re a first-time investor, it’s also important to understand which types of buildings you should avoid. When compared to other types of commercial properties, independent restaurants and bars, for example, incur a far higher amount of risk and have a higher failure rate. It’s also a good idea to stay away from residences in high-vacancy zones.
Pros of Investing in Commercial Real Estate in Canada
A Higher Potential of Returns
Rent for commercial properties is frequently greater than for residential properties. Most business leases are triple net, which means they have higher asking prices. This relieves you of many of the dangers that come with residential leases.
Diverse Portfolios
If you currently have residential real estate investments, diversifying your portfolio with commercial real estate can help you diversify your cash flow.
Better Tenants
Businesses make excellent renters because they have a personal stake in the property’s quality and condition. Business owners will sometimes spend on costly property upgrades to improve their space, which will benefit you when it comes time to change tenants.
Long-Term Leasing
Commercial leases are often significantly longer than residential leases, with lower turnover rates. This allows you to create consistent cash flow for a longer duration.
Checkout Best Construction Mortgage Rates in Canada
Cons of Investing in Commercial Real Estate in Canada
Higher Risks
When you buy a commercial property, you get a higher risk rate. Rental properties are more frequently broken into, vandalized, or damaged than residential ones.
Complicated Renting Procedure
While tenants of commercial properties are more involved and invested in the property’s success, finding a good tenant might be tough. You may need to employ a commercial property management company to assist you in screening potential renters and finding the best match for your needs.
Higher Costs
Commercial properties typically command greater rentals than residential ones, but the asking price is also higher. A commercial mortgage will almost certainly require a greater down payment as well as higher interest rates. If you want a more hands-off investment, you can hire a property manager to look after it.
How to Purchase Commercial Real Estate in Canada
Find a Good Listing
There are numerous web venues to choose from when looking for commercial real estate listings. There are a few other options to consider if you prefer a more tailored approach. Meeting with a real estate agent is one option that can help you answer many of your investment-related questions while also making it easier to find property showings.
Another excellent alternative is to join a real estate investment club. You don’t have to be an expert in investing to join one of these organizations, but member networks and events can connect you with plenty of people who are. Member networks and databases can be helpful in locating postings in your desired city.
Mortgage Down Payments
A commercial property’s down payment, asking price, and mortgage rate will almost certainly demand more money than a residential home. The requirements for mortgage approval will be much stricter due to the larger value of commercial mortgages.
Your credit score, income source, and debt-to-income ratios will all be scrutinized. The property itself will also be thoroughly inspected. In order to verify the stability of your cash flows, you may need to prove and justify the profitability of the business that occupies your facility.
Space Renovation
A triple-net lease can help you save money on renovations when buying a business property. However, you need to guarantee that your renovations are conducted professionally and that your house complies with industry requirements.
If you’ve taken on a commercial tenant, they might organize the renovations themselves. In either case, be sure the builders you employ are skilled, respected, and have the necessary experience to meet your building’s requirements.
Work With A Professional Today!
The best approach to figuring out whether a commercial real estate investment is suited for you is to talk to a professional commercial loan lender about your possibilities. You can decide on the best investing strategy for your specific scenario together.
Looking for expert mortgage guidance and lenders with quick and easy application processes? Schedule a free consultation with a trusted Freedom Capital broker today!
