Commercial real estate can be a great investment. It is often even better than residential property. Even if you are an experienced investor in real estate, it is important to know that buying commercial property differs from buying a home.
It is important to understand the pros and cons before you invest in commercial property. You should also be aware that the potential for greater reward is often accompanied by a higher price tag and increased risk.
An in-depth review of how to buy a commercial property
1. Understanding your motivations to invest in commercial real estate.
Why are you interested in investing in commercial real estate property? Before you begin looking for property, it’s important to ask yourself this question.
You want to reduce the risk that your tenants will not pay by renting out an apartment or office. You are looking for a building that you can use at least partially for your business.
You may want a bigger property that has the potential to increase in value and equity over time. You may be looking to maximize your investment portfolio or take advantage of tax advantages.
Identifying your “why” is important before investing. Understanding why you are interested in purchasing commercial property will help you find the best investment.
2. Consider your investment options.
Understanding the types of commercial property is important if you are interested in investing in commercial real estate. Commercial properties can include, for example:
Apartment Buildings
* Office Buildings
Retail Buildings
* Malls
Warehouses
* Industrial Buildings
* Mixed-Use buildings
Commercial properties are often used to conduct business.
3. Secure financing.
It’s a good idea to plan your financing in advance before you start looking for a commercial property. Checking your credit is the first step to getting commercial property financing and other types of financing for business.
Your business credit reports and scores may be considered depending on the lender you choose and the type loan that you are applying for. Some lenders will also check your personal credit.
When you set up an account with Nav, you can check your personal and business credit scores for free. When you create an account with Navi, you can access your credit scores for both personal and business purposes free of charge.
After you have verified that your credit is accurate, you can dispute any errors. Then you should take a good look at what type of financing you may qualify for. You may be able to qualify for one of these financing options depending on your credit score, the type and location of the property, as well as other factors.
* Apartment Loans Fannie Mae, Freddie Mac and FHA
* Loans on Bank Balance Sheet
* Commercial Real Estate Loans
* Business Loans
Hard Money Loans
* Seller Financing
* Etc.
Compare interest rates, fees and repayment terms as you search for the best financing options available. The Marketplace can be a valuable resource when reviewing financing options for your business.
4. Join forces with the right partner.
Commercial real estate is a complex process that involves many moving parts. It can be complicated. Even experienced investors understand that they need to surround themselves with the best team of experts in order to ensure their investment is successful.
You may need the help of some experts to ensure that your commercial real estate transaction goes smoothly.
Commercial Realtor
* Accountant
* Commercial Real Estate Attorney
Commercial Lenders or Mortgage Brokers
Tax Attorney
It’s a good idea to gather your team before you begin looking at potential properties. You’ll know exactly who to contact if you hire the right people up front. It might be expensive to hire a team of professionals, but you could save yourself from making costly mistakes.
5. Find the best property for your market.
It’s now time to have some fun. Once you’ve figured out your “why”, you’ve sorted out your financing options, you have a team assembled of experts and you’ve figured out your investment options, it’s finally time to start the search for your dream property. Now you’re ready for the fun part: shopping around in your local market to find the perfect property.
You can find properties that match your criteria with the help of a commercial real estate agent. Attention to factors such as location and usable square footage. Don’t let a great deal distract you if the investment is not what you want. If you decide to invest in an apartment complex, you don’t need to worry about how good an office building appears on paper.
6. Do your homework.
It’s important to do extensive research on the property that you are considering buying. Your commercial realtor can help here but you should also do your own research.
You can never be too informed about the property you are considering buying. You may want to research or ask the following questions:
How has the property previously been used? Do you intend to use it the same way?
* Is the property zoned appropriately to suit your business plan if you intend to use it for a new purpose?
* If necessary, can you request a zoning change?
* What is the current annual income or rent of the property?
Can you ask the owner to show you his rent roll? Can you confirm the current tenants of the units listed in the rent roll?
What is the Property Tax?
The building may need significant repairs immediately or in the near future.
* Is it located in an area that is desirable? If you are looking for higher rents, and a potential high appreciation rate, then you should search for areas with less than 5% vacant space.
Is the investment deal right for you?
A commercial property purchase is different than purchasing residential real estate. A bad investment can be more expensive. You can start by studying real estate books and resources from successful investors if you are new to real estate investing.
7. Offer and close a deal.
It’s now time to submit an offer when you have found a property that you are interested in purchasing. It’s a good idea to get your lawyer to review your offer before signing and submitting it. Your commercial real-estate agent can help you with the writing of your offer. When you enter into a contract, the seller may ask for earnest funds (potentially as much as 1% of the total purchase price but sometimes even more).
Make sure that your offer includes a period of due diligence with an escape route in case certain things (like zoning problems or the property failing inspection) go wrong. This escape hatch is called a contingency provision.
As a closing condition, your lender might require that you complete an American Land Title Association (also known as an ALTA) survey during your due diligence period. A survey by the American Land Title Association (ALTA) can provide valuable information on the property. This includes the boundary lines, the location of utilities, easements, and improvements.
You can move on to closing if everything goes smoothly with your ALTA and your other due diligence. You should be guided through this complex process by your commercial realtor and real-estate attorney. It’s important to assemble a team of professionals you can rely on well in advance.
Questions to Ask Before Buying Commercial Real Estate
It’s crucial to collect the correct information before you purchase commercial real estate. You need to know the right questions you should ask to achieve this goal.
We’ve already discussed a few important questions that you should be asking. We have not yet covered a few other important questions.
What is the difference between commercial real estate and residential real estate?
Commercial real estate can be defined as property used exclusively for business. Commercial properties include apartment complexes as well as office buildings, retail stores, etc. There are also different types of commercial property.
Classifications of office and apartment buildings include:
*Class A Properties are of high quality and represent a lower risk. These properties are often newer and demand higher rent. They also require fewer repairs or renovations, aside from routine maintenance. Property management companies may manage Class A properties, and they can make them easier to sell.
* Class A buildings may be newer and offer lower rents than Class B . Some of the deferred maintenance may also need attention. Class B properties tend to be seen as more risky and therefore may have a lower price.
Class C Properties are the most risky for commercial real estate investment. They can be bought for much less money. They are often older than 20 years and may need extensive renovations. Class C properties are often rented at a lower rate than class A and B properties.
Different designations are used for other types of commercial property, like industrial buildings, retail stores or hotels. It’s important that you understand what each building classification means for you, as an investor. Understanding the differences in commercial real-estate classifications will help you to better understand the risk associated with an investment.
Why is the owner selling ?
It’s crucial to find out why an owner is selling a property. Here are some common reasons that owners give for selling their investment property.
* The owner believes that the market is strong and that he can get a fair price.
* The owner wishes to withdraw funds from the investment for another.
Selling has tax benefits.
Rent income is not performing as expected.
* Many long-term tenants are terminating their lease.
* A balloon payment is due in a few weeks.
It’s not always a sinister reason why an owner is selling. Knowing why the owner wants to sell could be helpful when you’re negotiating a price.
Is it better to invest in single-family homes or commercial real estate?
Single-family home rentals are a good way to start investing in real estate. If you’re looking to increase your portfolio and boost your cash flow then a commercial property could be the right choice.
Matt Larson is the President of Cricket Realty Advisors. He says that commercial real estate returns on average 6% to 12% annually above its purchase price. Larson writes for Nolo.com that single-family home returns are 1%-4% on average. No real estate investment, be it a commercial or residential property, is guaranteed.
Learn Important Terms
Real estate is filled with terms and acronyms that most people do not encounter in their daily lives. It is helpful to understand these terms as a potential investment.
Ad Valorem A taxation system based on an official appraisal of a property.
Cap Rate: A rate of return on a property divided by its value. The formula is: Cap Rate = Net Operational Income / Appraised Property Value
The term is used to describe the amount of cash that investors have invested in real estate. The term refers to the annual income of a property compared to how much you invested in cash. The amount invested could be the same as your down payment.
The Debt Service Coverage Rate (DSCR) is An indicator of a property’s annual net income compared to its annual debt payments. The formula is: DSCR = Total Debt Service / Annual Net Operating Income
LTV: The ratio of loan-to-value (LTV) is a measure of how much you are willing to borrow in comparison to the value of the home you intend to buy. LTV is calculated using the following formula: LTV = Amount of Loan / Value of Property
Rentable square feet: Total area that a tenant occupies wall-to-wall, plus a portion for the common areas, such as hallways, stairs, bathrooms, etc. ).
Square Feet Usable: Total area that a tenant occupies excluding shared space.
Vacancy rate: Percentage of units available in a rental that are not occupied.
Last Word: Buying Commercial Property
Most real estate investors begin with small investments and progress to commercial listings. But that isn’t always the case. If you are willing to learn and take the time, commercial properties can be a good investment, regardless of your previous experience.
Any investment, including commercial real estate, comes with some risk. If you buy a commercial property with no plan, the risk will be magnified. It’s crucial to seek professional advice, to assemble a team of trusted individuals, and to do all you can to safeguard your assets.