Investing in commercial properties is an important step for anyone looking to add assets other than traditional homes to their portfolio.
Learning to buy commercial property will require more involvement than traditional single-family homes.
While commercial buildings can result in a larger payday, there are risks investors should be aware of before they start investing.
Commercial real estate is at the top of many investors’ wish lists, and for good reason: it has proven to be a lucrative endeavor time and time again. However, if you want to buy commercial property it is important to understand that increased reward can also mean increased responsibility. That’s why it is crucial to mind your due diligence and follow sound practices.
As you might expect, commercial properties are a departure from traditional single-family investments. From crunching numbers to raising capital, buying commercial real estate will require more out of an investor. That said, with the right dedication you can learn how to take on more complex properties. The following guide will walk you through how to buy commercial real estate and help you get started today.
Buying commercial properties can be thought of similarly to purchasing traditional real estate, but on a bigger scale. Investors will still need to conduct sufficient research and mind due diligence; but there will be differences in the numbers. Commercial properties often equate to higher purchase prices, longer leases, and increased rental income. To prepare for these differences, investors should ensure they have the right systems in place. Not surprisingly, as you gain experience you will become more comfortable analyzing properties and landing deals.
If you want to start purchasing commercial real estate, or you simply want a better idea of what to expect, consider the most important steps in the commercial real estate buying process:
1. Ask Yourself Why You Are Investing
Before you can even consider buying commercial real estate, you need to ask yourself why you are doing so in the first place. There is no point in investing in a commercial asset if you don’t know what you hope to accomplish. Instead of investing first and determining what you want later, try identifying your “why” first. Determine what you want to accomplish, and then search for an investment that can help you achieve that goal.
2. Consider Your Investing Options
Commercial real estate is a broad term, and can include everything from retail shops, industrial complexes, office buildings, large apartment buildings and a whole slew of other types of commercial real estate. In other words, commercial real estate is property used for business purposes. It is, therefore, in your best interest to determine which type of commercial real estate you want to deal in. To help you with your decision, remember why you are investing in the first place.
3. Secure Financing
Try to secure financing before you even start looking for a commercial real estate property to buy. That way, you’ll not only know how much you can afford, but you will be able to facilitate a deal faster and more efficiently with the money “in hand.”
4. Align Yourself With The Right People
Real estate is a people business, and buying commercial real estate is no exception. You will want to make sure you align your services with the right professionals. Consider hiring a commercial real estate agent that specializes in the types of transactions you hope to complete, a commercial real estate attorney well-versed in the laws of commercial real estate, and even a certified personal accountant (CPA) to make sure the deal goes according to plan. There are a number of professionals that can help, so don’t be afraid to ask for assistance. The right partners may be the key to landing the deal of your dreams.
5. Find A Property That Meets Your Criteria
With everything in place, begin your search. By now you should know your criteria; stick to it. Remember why you are buying commercial real estate, and look for a property that can get you to the finish line. Remember, there’s no reason in buying a property that doesn’t help you realize your goal, no matter how good of a deal it may seem on the surface.
6. Mind Due Diligence
Again, buying commercial real estate isn’t the same as buying a single-family home. Before you proceed, mind due diligence. Run the numbers and analyze the deal as a whole. Are the inherent risks worth the potential rewards? Is there another property that would be better suited towards your goals? Now is the time to analyze every detail. Only move forward once you are certain the property will be beneficial to your portfolio.
7. Close The Deal
Once you find a property worth pursuing, be sure to make an offer with a contingency clause. More specifically, make an offer with an inspection contingency that gives you an out in the event the commercial property doesn’t pass the inspection. If everything looks good, continue to mind due diligence by getting the appropriate insurance set up and reviewing all included documents. There’s a lot that goes into a commercial real estate transaction, so make sure you are prepared.
I want to make it abundantly clear: this is by no means a comprehensive list of every step associated with buying commercial real estate. It is, however, representative of some of the most important steps you should never forget. To be clear, you should consult a professional before moving forward with your own commercial real estate purchase.
Is Buying Commercial Property A Good Investment?
Yes, buying commercial property has proven to be a smart investment for those who know what to expect. The income potential alone is what draws so many real estate investors to this asset type. Commercial real estate is known to have a higher return on investment when compared to residential properties. Aside from the profitability, buying commercial real estate can also lead to stronger professional relationships, more flexible lease terms and limited business hours. Investors who opt for commercial real estate will also enjoy attractive financing options and equity appreciation.
In order for commercial real estate to be a smart investment, there is one thing you will need to look for first: an experienced commercial real estate broker. Nothing else will be worth as much to your search or help you over the course of a commercial real estate deal more so than a professional that is well-versed in commercial real estate. And while their services will certainly set you back (somewhere in the neighborhood of six percent of the purchase price), I can assure you it’s usually worth it. A great commercial real estate attorney will help you every step of the way, from finding a deal to negotiating terms and prices. In fact, it’s entirely possible for a good agent to save you more money than their services cost.
Once you have a commercial real estate professional on your side, begin to explore the different types of commercial properties on the market. Whether you realize it or not, there are significant differences between office buildings, industrial properties, retail properties, apartment buildings, and every other type of commercial real estate. It’s in your best interest to know them all. Be careful to vet the options made available to you. Look at the types of commercial real estate up for sale, and determine which type of property suits your needs. What the property is zoned for will have a big impact on how you proceed, so it’s best to know what you are getting into ahead of time.
Buying Commercial Real Estate Questions To Ask
At this point you may still have questions about commercial real estate, and that is okay. Learning to take on more complex investing strategies takes time and research. If you still have questions on how to buy commercial property, there are resources you can use. The following questions about buying commercial real estate can help:
Why is the owner selling in the first place?
Not unlike every other investment strategy, buying commercial real estate will work out more often than not for those that mind due diligence. More importantly, the more you know about a respective deal, the better off you’ll be, and the reason behind the sale is no exception. That said, uncover the exact reason the current owner is intent on selling. Not only will the answer be able to help you in negotiations, but it could point to any red flags that are best left avoided. Just remember one thing: sometimes the best choices you make are the ones you don’t make.
What are the different types of commercial real estate, and why should I care?
Commercial real estate represents a lot more than simply shipping centers and restaurants. These properties can be anything from retail stores to hotels and office buildings, and a lot of things in between. As such, each commercial property is most likely zoned according to its purpose, and that zoning is important for you to pay attention to. Perhaps even more importantly, the zoning will determine what you can do with the property if you buy it, so be aware. Make absolutely certain the zoning laws fit with your strategy.
Why should I invest in commercial real estate over single-family homes?
Commercial real estate boasts one benefit that single-family homes have a hard time matching: the value of scale. Do to the sheer size of most commercial buildings, at least as they compare to traditional homes, commercial buildings offer the potential for larger profits. It is also nice knowing most of your tenants will have a vested interest in the property, which means you are less likely to deal with unruly tenants. Business owners are typically more inclined to treat the property with respect because it is, after all, their own livelihood.
Buying Commercial Property Tips
Learning how to buy commercial properties has become the next logical step for many investors that have grown comfortable dealing in single-family homes. If for nothing else, commercial real estate represents the next challenge or exit strategy that can elevate your investing career to an entirely new level. While buying commercial real estate can certainly coincide with amazing benefits, it’s not without a few downfalls: risk, difficulty, and the sheer volume of capital required to deal in commercial real estate can all impede an investor’s progress.
It is worth saying, however, that buying commercial real estate is not impossible. Not unlike buying single-family homes, there’s a process; one that, if followed correctly, can result in amazing benefits. That said, you must know what you are doing if you hope to realize success in the commercial industry. Jumping in without a plan is the surest way to sabotage your own efforts and ruin everything you worked so hard to achieve.
If you want to successfully make the transition to commercial real estate familiarize yourself with the commercial real estate buying process. Here are a few buying commercial property tips to help:
Learn The Language: There can be a learning curve when making the transition from residential to commercial real estate, so you may need to go back to basics before you get started. Familiarize yourself with terms and concepts commonly used in commercial real estate, like capitalization rate and building classification. Reviewing the language will help make sure you are comfortable when talking to potential business partners, tenants and especially lenders.
Find A Market: Just like with any real estate investment, location is everything. It is not uncommon for commercial real estate investors to venture outside of their market area, or to invest in multiple markets. Analyze each market you may want to invest to find the right area to invest. Don’t be afraid to choose high performing markets simply because they are outside of your local area or state.
Work With Your Mentor: A mentor is crucial for any real estate investor, but they can be especially helpful when it comes to more complex investing strategies like commercial properties. Attend real estate networking events in your area or ask your existing connections to meet someone with experience in commercial investing. As you build a relationship over time, their advice and insights could help as you build a portfolio.
Visit Properties: As you start identifying potential properties, make sure to visit each of them. This will give you a better idea of what to expect if you choose to move forward with the deal. Even if you do not plan on managing the property yourself, it is still a good idea to picture what the building will be like. Visiting properties can even help you narrow down your options if you have more than one investment you are trying to choose between.
Protect Your Assets: Before you move forward with your first commercial deal, make sure the rest of your assets are properly protected. Look into the way your business is currently organized and how a commercial property will fit into that. Research different types of liability insurance and business structures before taking on more complex properties.
Buying commercial real estate can certainly be well worth your time if you do it correctly. Savvy commercial real estate investors have already proven that it belongs in a well-rounded portfolio, but I digress. For as beneficial as it can be to own commercial real estate, it can be equally devastating for those that go in without a plan. If for nothing else, commercial real estate investing comes with risks for those that act irrationally. Poor investment practices could result in devastating problems, and they are only magnified by the size of commercial investments. Therefore, it pays to have a sound plan in place. With proven systems on your side, you are more likely to avoid the pitfalls of commercial investing and realize success.
Did these steps help you learn how to buy commercial property? Are you ready to get started purchasing commercial real estate? Let us know if this guide helped answer some of your most important questions on the subject matter in the comments below.