Buying commercial real estate is similar to buying a residential home in many ways, but it also requires much more research, forethought, and planning. Regardless of whether you are preparing to buy a commercial property for business use or as an investment, you understandably are focused on making a smart, savvy decision that helps you to achieve very specific goals. By taking these essential steps when you are searching for the right property, you can make your purchase with confidence.
Understand Market Conditions
When you are searching for a commercial property for business use, market conditions may dictate the price per square foot of affordable real estate in different areas of the same metropolitan area. The availability and cost of labor, real estate taxation, labor laws and more may all impact where you search for a property. Likewise, when selecting a commercial property for investment purposes, you must understand how all of these factors may impact how easy it is to lease your property for a great rate to a qualified tenant. In addition, projected market conditions, as well as planned growth and developments, should be taken into consideration.
Get Prequalified for Financing
Commercial real estate financing differs from residential financing in many ways. For example, underwriting may be dependent on the borrower’s qualifications as well as on the property’s income, condition, and other factors. Even the environmental impact of neighboring properties may be scrutinized. Furthermore, the loan-to-value is lower than it may be with residential real estate. Commercial real estate is divided into tiers for financing purposes. Multi-family properties are an example of a tier 1 property, and a gas station or a stand-alone restaurant may be a tier 4 property. The loan-to-value for lower-tiered properties may be substantially lower, and this means that you may need to come up with a much larger down payment.
Define Your Goals
Another important preliminary step to take as you search for the right property to purchase is to define your goals. Consider how long you wish to hang onto the property and what return you want to generate. Think about if you will manage the property on your own or if you will hire a property manager. Should the property already have tenants and be producing income from your first day of ownership, or will you renovate the property and use it for your own business activities?
Hire a Commercial Real Estate Agent
After completing these initial steps, you may be ready to start exploring the market and searching for a property to purchase. Hiring a local real estate agent with profound experience in the commercial market is an excellent idea. The commercial real estate market is very different from the real estate market, so an experienced residential real estate agent may not be able to provide the same level of service as a commercial agent would. In addition, it may be helpful if your real estate agent has specific experience with the type of commercial property that you are in the market for. For example, there are major differences between a retail strip center and a self-storage property.
Examine Options Thoroughly
Each property that you may look at will have pros and cons. Furthermore, the financial implications may vary dramatically. For example, one property may be in great condition, but it may have a much higher sales price. On the other hand, another property may require repair work or even significant renovations, but it may be available at a much lower sales price. Unless you can find financing to pay for the repair work, you may need to have enough cash on hand to pay for the renovations in the second property. Therefore, your financial situation will impact the options that are most well-suited for you.
As you can see, numerous factors must be considered before you locate the right commercial property to purchase. Because this is a major transaction, it makes sense to build a team of experts whose knowledge you can rely on. This may include a real estate lawyer, a financing team, a commercial agent, a property manager and more. By doing so, you can have the support and guidance that you need to make thoughtful decisions going forward.