1.) What’s Your Type?
There are many different types of commercial properties that you can purchase, including:
o Retail Space
o Warehouse Facility
o Commercial Condo
o Strip Mall
The first step is clearly defining what type of property you want to purchase and how you want to use it. The following information will help you maximize your investment dollars to get the best possible deal when purchasing your property.
2. Build Equity With Your Investment
Equity is Money
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Building equity is the primary, if not the ultimate, reason to buy instead of rent a commercial property. Let’s face it. It’s money in the bank. In fact, it’s better than money in the bank because you can’t get the same kind of return on your money when it’s sitting in the bank as opposed to when you’re building equity. Moreover, if you choose the right financing for your commercial real estate purchase, you can not only build equity through ownership, but you can also leverage your capital saving to grow your business, hire additional employees, or even purchase an additional location when the time comes.
Owning beats renting because you can sell your investment once you outgrow the space or sell the business. So even if the commercial property in your area has not appreciated (which is unlikely), you can recoup your investment by renting out space once you move out and by selling when the time is right.
If you plan on growing into your building, buy something larger than your current needs, and rent out the extra space until you need it for expansion. This will provide you with a steady income that you can use to help pay your mortgage or invest in your business.
3. Calculate Your Savings And Your Potential Profit
Lower Monthly Payments
Consider buying commercial real estate as saving for your business. Real estate costs are the third largest business expense, behind payroll and taxes. In addition, long loan amortizations mean that your monthly payments could wind up being less than what you would pay for rent since landlords usually charge more than their monthly loan payment. In other words, owning your own commercial property may actually be more affordable, depending on current market conditions.
Ask your lender to provide you with an analysis of the current market in your area so that you can see which scenario is best for you (renting or buying). The lender should explain your options in detail with examples of monthly rental costs vs. monthly loan payments and the benefits of each.
Analyze the Rent Value
Upon finding a property that piques your interest, find out the status of the current tenants (if it is a multi-tenant property) in terms of how much rent they are paying. Next, check the current market to see if the rents are undervalued, meaning below what you can get in the current market. Your realtor or lender should be able to help you figure out how much you could charge for rent and determine how much of a profit you can make each month.
There are many tax advantages to becoming an owner of a commercial property. In most cases, you can deduct part of the value of the building at tax time, as well as improvements you’ve made as depreciation, which can save you more money on your taxes. Buying the property under your business or corporation’s name is also a better tax strategy than under your personal name.
4. Do Your Research
The more you can learn about property types and options, mortgages, financing, zoning, and remodeling, the better position you’ll be in to make wise decisions concerning the acquisition of a commercial property.
However, you don’t have to know everything. That’s where putting together a powerful team of professionals proficient in their areas of expertise may be your most important step. In addition, building a team of advisors – people you can trust to steer you in the right direction is critical to your success.
Understand Current Market Conditions
Keep your eyes open for news articles about the commercial real estate market. For example, is it “hot” right now? Is it a buyers’ or sellers’ market? What kinds of interest rates are available?
The Internet is a great place to start. Conducting a Google search for the “commercial real estate market,” for instance, will give you results that include news and resources for national trends, analytics, and market research.
In addition, many realtors, lenders, and lawyers across the country offer free and timely articles on their websites that shed light on current commercial real estate trends nationwide. So again, make sure you listen to both sides of the story.
Tap Expert Resources
National market research companies can give you specific information about the area you’re preparing to locate your business. You can also find information on demographics, including the median age, household income, breakdown of ethnicities, and more from censuses available from the U.S. Census Bureau.
Also, contact commercial lenders or realtors for additional resources. In looking for help, it’s usually better to talk to a lender or realtor with nationwide experience and up-to-date information than a small-time operation that might not have recent data for you. If the lender/realtor hasn’t gotten updated demographics since 1996, you’ve essentially wasted your time. Also, a lender or realtor that specializes in the type of property you’re looking for will be more likely to have the specific information you need, which will save you time in research.
Study the Current Vacancy Rate
Research what the vacancy rate has been over the past few years for the area you’re considering. If there seem to be high levels of vacancies, try to find why. Is it a bad neighborhood? Talk to store owners in the immediate area and find out how long they’ve been doing business there. Ask if they have any concerns that you should know about the area as a potential property owner.
Research Commercial Realtors
It’s important to research commercial realtors that specialize in the type of space you’re looking for. Grill the realtor you are considering selecting on the entire purchase process, so you know what to expect. Ask how long the process usually takes so that there are no surprises. Check their references and their track record (more on finding a Commercial Realtor in #5).
Examine Experienced Commercial Lenders
Choosing a lender and financing program is just as important as choosing the property. So, again, find out the entire process of financing, as well as your different options. Don’t assume that just because you’ve had a relationship with your bank for years that using their financing is the best choice.
Banks don’t always offer the lowest rate for commercial loans and sometimes have a far longer turnaround than non-bank lenders. In addition, some banks require that you transfer your accounts to them to qualify for a loan. Be aware of any stipulations when seeking a bank for a commercial loan.
5. Choose the Right Commercial Realtor
As mentioned before, you need qualified partners to help you with the process of buying commercial property. Start with a terrific commercial realtor.
Some commercial realtors work exclusively with individuals interested in investment properties. Others work with owners/users of commercial real estate, and among those, some specialize in property management, which can be an added value to you.
Who Do You Know?
Referrals from trusted sources are usually the best way to find a good commercial realtor.
Set up a meeting with more than one potential commercial realtor. Find out as much as you can about their professional background, education, and experience with your property type. You can ask for a list of recent transactions to give you an idea of what they deal with regularly and how many properties they’ve actually sold in the last year or two. And most importantly, ask for client references (testimonials)! Real client feedback is the most effective measure for potential success.
The Right Match
Make sure you choose a realtor that understands your specific needs. If you are a small business, you don’t want to work with a realtor that normally handles multi-million dollar deals. Your project may become less of a priority when that particular realtor gets a bigger commission to worry about.
6. Consider Your Time Frame
If the reason you are looking for commercial property is that your lease is ending, think twice before jumping into a decision you might regret. Finding just the right space, securing financing, and going through the process of obtaining a commercial property can take months. If you don’t have that kind of time, you may need to rent month-to-month for now.
Take Your Time
While you may be in a hurry to move into space, take your time. Buying any property is a major decision, and buying commercial property is even more important for the development and growth of your business. Selecting a property in the wrong area or a space that doesn’t allow you to grow can hinder your company and even cause it to fail, so plan carefully.
Suppose the realtor or lender gives you an estimate of three months from start to close; plan for longer – just in case. Keep in mind there are many people involved in buying property, from the seller, realtor, lender, appraiser, surveyor, paperwork approvers, secretaries, and more, and this process can often take slightly longer.
7. Location, Location, Location
One of the most important factors in considering the commercial property is located. If a property is located on a busy corner that is difficult to get to, your business may not do well (in fact, that’s probably why the property is for sale). If you want to operate a dog kennel and the property you’re considering is in a residential area, not only will your business disturb the residents, the zoning laws may prevent you from operating there.
For a retail business, look for areas with high foot traffic to give you the exposure and increased walk-ins you need to be successful.
If you are looking for an industrial or manufacturing facility, you can stay out of the retail limelight and buy something in a warehouse district. These areas are usually cheaper than retail space.
Make sure your location has easy access from the road. Look to see if the site is at a difficult intersection. Is there construction going on that seems like it won’t be ending any time soon? But, on the other hand, what’s the potential once the construction is completed?
Check out the Competition
If you want to open a bistro in a neighborhood with several bistros, you might want to try somewhere else with less competition. However, a healthy population of restaurants usually means a healthy population of customers.
Know Your Customer
Find out the demographics of the area you’re interested in. For example, if you want to move your sports apparel shop to a new location, you’ll probably want an area with a high percentage of youth and active adults. An urban area with pedestrian traffic might be better for this kind of retail shop than a suburban area in a retirement community.
8. Free Parking
We’ve all spent time driving around and around looking for a parking spot. It can be very frustrating, especially when you’re running late. Whenever possible, you want a location that has ample parking for your visitors.
If you have a retail store, restaurant, or other high-traffic business, estimate how many customers or visitors you’re likely to have at any given time and consider rejecting any properties that have fewer available parking spaces than your estimates. Again, use your best judgment and consult your realtor. When looking at a commercial property of any type, you need to spend time on the financial aspects of the property before you form an opinion about the price that you think you can achieve. The financial aspects of the property can have a major impact on the price and or the interest of purchasers. The financial aspects of a building or a property can impact the asset for many years and, for this reason, must be analyzed and identified.
We have detailed some of the major aspects of financial concern in a property purchase or sale scenario. Whilst these are not the only categories of activity and concern, they are the major ones in most circumstances.
We recommend that you create a checklist from these items so that your property review and inspection process is suitably enhanced and professional.
The Asset Schedules: The property will contain many fixed and moveable assets. These will normally be detailed on the asset register. A well-maintained commercial property will have an up-to-date asset register for your review. Obtaining the asset register at the early stage of sale consideration is productive as it will tell you in detail what you are selling and later become part of the due diligence process.