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Deciding whether to purchase commercial real estate

Californians who are interested in possibly investing in commercial real estate may wonder whether or not purchasing a particular property is a good idea. Analyzing whether a piece of commercial property is a good investment or not involves some purchase price, operating expense and potential income calculations.

The first consideration for a building is the area in which it is located. If the location is sound, then its value should increase with inflation. Buildings located in less desirable areas may not keep up with inflation and thus may not be a smart purchase. After analyzing the location, the next step is to determine whether the price point is an attractive one.

Commercial real estate in good areas generally increases above inflation by an average of 4.9 percent. To determine the net profit for a property, investors can take the gross rental income of the property and subtract all of the building's operating costs and expenses. Calculating a good annual rental income involves adding an inflation percentage of how much the building's purchase price is to the annual operating expenses and maintenance costs. Then, that figure is divided by the total square footage to result in an appropriate rental figure, which is normally expressed by square footage.

If average rental prices per square foot are lower than the rental prices needed for the building, the price is too high. If they are similar to the needed price, then it's still important to research other issues, including the applicable zoning laws. A real estate lawyer may help a client with the research and analysis that is needed to determine whether or not a target property is a good choice.

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