How Do You Buy Commercial Real Estate
As you might expect, commercial properties are a departure from traditional single-family investments. From crunching numbers to raising capital, buying commercial real estate requires more 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 buying commercial real estate and help you get started today.
how do you buy commercial real estate
Commercial property is any real estate property that is specifically used for business purposes. Commercial property is defined as buildings that house businesses, land with a primary purpose of generating profit, and residential rental properties. Using a building as a commercial property affects financing on the property, tax treatment, and specified laws on the building.
Industrial, commercial real estate spaces are factories, plants, or warehouses used to manufacture and distribute products. On the other hand, retail commercial spaces are used for the selling of products and services. These can be malls, shopping centers, or stores.
Hospitality commercial real estate includes hotels, motels, and even some forms of short-term rentals. Finally, multifamily commercial real estate buildings are residential properties that include five or more dwelling units such as apartment buildings and complexes.
Buying commercial property is commonly known as a worthwhile investment. Investment costs, including additions and customizations for tenants, are significantly higher than residential properties. In turn, the returns on commercial properties are also significantly higher.
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.
Commercial real estate is a broad term and can include retail shops, industrial complexes, office buildings, large apartment buildings, and many other commercial real estate types. In other words, commercial real estate is property used for business purposes. Therefore, it is 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.
There are numerous financing methods to choose from, ranging from a commercial real estate loan to hard money lending. It is not uncommon to utilize more than one source of funding for a commercial deal. Depending on the specific property, you can tap into a small business loan, apartment loan, or even seller financing. Each of these options will come with unique loan terms and interest rates, so weigh your options carefully.
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. Besides 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.
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:
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 many 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 certain the zoning laws fit with your strategy.
Commercial real estate boasts one benefit that single-family homes have a hard time matching: the value of scale. Due 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.
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 talking to potential business partners, tenants, and lenders.
Work With Your Mentor: A mentor is crucial for any real estate investor, but it can be beneficial 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 commercial investing experience. As you build a relationship over time, their advice and insights could help as you build a portfolio.
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.
There may come a time when your real estate investing business outgrows your home office or rental space. These growing pains can slow down business operations by preventing owners from hiring new employees, taking on new deals, and earning certain financial benefits. The next logical step is typically to purchase a commercial space for the business itself when the time comes. In fact, according to a study from Bank of America, the small business sector occupies 30 to 50 percent of all commercial real estate spaces. However, many business owners get stuck on one main question: how do you find the right commercial property for your own business?
The answer is actually much simpler than you think. The processes laid out above still apply to a commercial space being evaluated for your own business. You need to look at the market, the different financing options, and the potential return on investment. After considering these aspects of a commercial property, business owners must then take it one step further: putting themselves in the position of a potential tenant. Imagine how your business will fit into the space. Is there enough parking? How will the office be laid out? Is there room for future expansion?
Analyzing and underwriting a commercial deal is far from the process used to review a residential property. There are numerous additional variables to consider with a commercial deal, though market factors remain crucial. Investors should take time to develop the right deal analyzer, including a quick way to determine if a property is worth a closer look. Many commercial investors utilize a gross profit percentage or capitalization rate formula as part of their analysis. Other variables, such as price per square foot or cash on cash returns, can be helpful to consider as well.
In essence, underwriting commercial real estate is a great way to determine the profitability of a given deal with your financing, property, and market in mind. It is a good idea to create a spreadsheet to quickly calculate and record your numbers. As you analyze and tackle more commercial deals, you will find the underwriting process that works for you. In time, you can develop a foolproof system for deciding on the right investment properties for your portfolio.
The Certified Commercial Investment Member (CCIM) Institute offers coursework on the commercial investing process. The CCIM Certification is taught by leaders in the real estate industry, and is aimed at investors, brokers, agents, and other professionals in the industry. The coursework teaches various methodologies for evaluating and underwriting commercial deals. While the CCIM Certification is not an industry standard by any means, it is one route to bolster your credentials, learn about the industry, and eventually expand your investment portfolio.
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, buying commercial property comes with risks for those that act irrationally. Poor investment practices could result in devastating problems, and the size of commercial investments only magnifies them. 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.
As most would expect, investing in CRE differs from buying single-family properties. Buying commercial real estate requires investors to crunch more numbers and raise more capital. Nonetheless, investing in commercial real estate can be done with the proper dedication. As a commercial real estate broker and investor, below are my tips on what you need to know when buying commercial real estate. 041b061a72