Figuring out how to buy commercial property isn’t exactly like buying a single-family home. The experiences differ in more ways than one. The costs, for example, can be steep with commercial real estate, and it may be harder to secure funding. In addition, if you don’t already have tenants, then it’s up to you to cover expenses during lengthy periods when the properties are unoccupied.
Not only that, but valuation for commercial property is often difficult. It’s generally harder to find comparable properties for commercial real estate than residential. Because of these differences, investors should be careful before purchasing.
If you think you’re ready to buy or invest in commercial real estate, there are a few steps you can take to prepare for the investment and purchase the right property to achieve your business or personal goals.
1. Define Your Motivation
While buying commercial real estate can be a worthwhile investment, plans tend to fall through if you don’t have direction. So, it’s important to reflect on your reasons behind buying commercial property. If you want to narrow down your motivation, consider asking yourself:
- What is a successful financial return to me?
- Who do I hope to impact through my investment?
- What are my long-term and short-term goals?
- Do I want security for me and/or my family?
Buying Commercial Property For Personal Use
Sometimes, investors benefit from real estate in more ways than just financially. Others purchase a property for personal use. One method is the owner-occupied commercial real estate (OOCRE) investment strategy. In this, the owner uses the property to conduct business operations.
OOCRE affords you tax advantages, like the ability to depreciate and deduct annual interest on the loan. In addition, owning the property allows you to build equity, which you can sell for more later. Or, you can continue using the property as an income stream through leasing. It’s also much easier to manage the property on-site and control the tenant selection.
However, there are some stumbling blocks. More costs may fall in your lap, such as property repairs and routine maintenance. Conflicts of interest can also arise, making it difficult to collect rent.
Before buying commercial property for personal use, check zoning laws. Certain limitations may apply to specific real estate, like office buildings or other commercial-designated spaces.
Buying Commercial Property For Investment Purposes
Buying a commercial building as an investment property comes with its perks. According to Bank of America, commercial property returns range between 6 – 12% annually; that’s higher than the average on single-family residential properties (which is typically around 1 – 4%). There are also tax advantages, cash flow opportunities and equity appreciation when you buy your commercial property.
Investors employ a variety of tactics depending on things like financial goals and the overall timeline. Here are some of the most common real estate investing strategies they use:
- Land banking: The process of purchasing and holding land. Investors do this to protect and grow their money, since it gets tied to a physical and fixed asset. They may sell the land or develop it in the future.
- Development: An investor buys raw land to build on, sometimes after waiting for its value to grow. The direction of development, like condominiums versus commercial, depends on zoning laws.
- Fix and flip: This strategy involves buying property, renovating it and then reselling it for a profit. Investors usually purchase poorly maintained land at a discount.
- Wholesaling: A short-term real estate investing strategy where the wholesaler buys a contract from a property seller, typically below market value. Then, the wholesaler sells or assigns the contract to an interested buyer.
- BRRRR: This acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Essentially, it’s a passive income strategy that involves flipping a property to rent out to tenants. Once the owner pays the mortgage and builds equity, they can refinance the property to fund future real estate investments.
- Passive investing: This strategy is for investors who don’t want to be directly involved. Instead, they put capital into a real estate deal through the stock market, crowdfunding or partnering with a more active investor.
2. Secure Financing From A Lender
Finding a lender for your commercial property early on is essential. Compare several lenders before you settle on one, though. While you want to secure financing, you should ensure your lender promises what you need. They should offer options according to your credit score range and at an affordable interest rate. Also, ask them about possible fees and penalties so that you know ahead of time.
Look out for the loan-to-value (LTV) ratio, or how much they’re willing to loan, and whether they ask for collateral as well. A recourse loan lets the lender go after additional personal assets if you default, whereas a nonrecourse loan only gives them the option to seize agreement-specific collateral.
As you ponder purchasing a commercial property, you may wonder about your lending options. Some of the most common are permanent loans, FHA loans, SBA loans, bridge loans and hard money loans. It’s important to note that Rocket Mortgage® does not offer commercial property financing.
3. Hire A Team Of Trusted Professionals
Everyone has to start somewhere, but first-time investors shouldn’t begin alone. It’s better to have people with experience and knowledge on your side. That way, the process moves smoothly and efficiently, which will save money in the long run. Some professionals you may want to think about hiring include:
- REALTOR®: A commercial real estate REALTOR® usually goes through more training than a residential REALTOR® and needs specific degrees, like business or finance. They help with many responsibilities, such as researching potential properties or negotiating terms for their clients.
- Attorney: A professional real estate attorney saves you time closing on a deal, protects your interests during negotiations, helps you understand applicable laws, get better pricing and ensure the agreement is legitimate.
- Accountant: An accountant handles the financial side of things, preparing budgets, creating monthly reports and generating any necessary statements for tax purposes.
- Mortgage broker: A mortgage broker matches you with the best lender for your needs. They can submit multiple loan applications, increasing your approval chances, and track down agreeable pricing.
- Contractor: These professional construction workers or companies oversee the site, materials, and more during the course of the project. They may also come with a team of specialized interior designers.
- Property manager: This individual supervises the property and ensures it has tenants who contribute to the real estate’s value. Property managers also facilitate or address repairs for on-site issues in the building. Other responsibilities include collecting rent, hiring contractors and meeting with potential clients.