The Investor’s Guide To Buying Commercial Real Estate
April 25, 2018
Buying commercial real estate requires a lot more involvement from investors than traditional single-family homes.
Knowing how to buy commercial properties is an important step for anyone looking to add assets other than traditional homes to their portfolio.
While commercial buildings can result in a larger payday, they have many risks investors need to be aware of before they start investing.
Buying commercial real estate has been placed at the top of a lot of investors’ wish lists, and for good reason: it has proven that it can be quite a lucrative endeavor for those that mind due diligence and follow sound practices.
Buying commercial real estate isn’t without a significant caveat; namely, that it’s quite the departure from traditional single-family investment. Whether you realize it or not, buying commercial buildings requires a lot more involvement. From research to capital, buying commercial real estate will simply require more of an investor. That said, if you wish to know what to look for when buying commercial real estate, you had better start studying. And if you aren’t quite sure where to start, the following guide to buying commercial real estate should get the ball rolling in the right direction.
How To Buy Commercial Properties
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; the next exit strategy that will elevate your investing career to an entirely new level, but I digress. While buying commercial real estate can certainly coincide with amazing benefits, it’s not without a few downfalls: Risk, inexperience, and the sheer volume of capital required to deal in a commercial real estate can all impede an investor’s progress.
It is worth noting, however, that buying commercial real estate isn’t impossible, only different. 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 invest in a commercial real estate, with an inherent degree of success, nonetheless, familiarize yourself with the commercial real estate buying process.
Commercial Real Estate Buying Process
Not unlike a traditional transaction, the commercial real estate buying process is about as easy or as difficult as your own experience facilitates. Not surprisingly, inexperienced commercial real estate buyers will find the process to be more involved than the one that has become ubiquitous with single-family homes. Experienced commercial real estate investors, on the other hand, most likely have a process in place that has proven successful in past transactions. After all, what is a great real estate investor, if not for someone that knows how to implement proven systems to realize habitual success?
If you want to get better at buying a commercial real estate, or you simply want to know the most efficient way of seeing a commercial deal through to the end, consider the most important steps in the commercial real estate buying process:
- Ask Yourself Why You Are Investing: Before you can even consider buying a commercial real estate, you need to ask yourself “why you are doing so in the first place.” There’s 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 determining what it is you hope to accomplish first, and subsequently shopping for an investment that can get you one step closer to your goal.
- 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.
- Mind Due Diligence: Again, buying commercial real estate isn’t the same as buying a single-family home. Before you proceed, mind due diligence on every step. Be sure to evaluate risks and rewards and run the numbers. Are the inherent risks worth the potential rewards? Better yet, now is the time to ask yourself if commercial real estate is the right move for your business in its current state. Only move forward once you are certain you want to get involved in commercial real estate, and that a particular purchase is worth pursuing.
- 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.”
- 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.
- 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.
- 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.
What To Look For When Buying Commercial Real Estate
There is one thing you need to look for before anything else when buying commercial real estate: 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 real estate on the market. Whether you realize it or not, there are significant difference between office buildings, industrial properties, retail properties, apartment buildings, and every other type of commercial real estate, and 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.
Questions To Ask When Buying Commercial Real Estate
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. Commercial real estate 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 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.
Do you know what to look for when buying commercial real estate ? Have you ever wondered if buying and selling commercial real estate is in the cards for your own business? Let us know if this guide helped answer some of your most important questions on the subject matter in the comments below.
– The Investor’s Guide To Buying Commercial Real Estate
