Easy Steps to Buy Commercial Property

The number of real estate stakeholders choosing to invest in commercial properties is on the rise, and with good reason. It is a worthy investment, one that is likely to reap large financial benefits. However, with the increase in reward comes added responsibility. Which is why it’s very important to do your research and consider best practices before investing. 

There is more to investing in commercial property than the traditional steps of buying a family home. It will take more than financial backing to succeed when investing in a commercial property. With that said, an adequate amount of research will give you the power to handle any real estate transaction with ease.  

What is a Commercial Property?

Commercial property is real estate meant for business only. Simply put, it is property that houses an organization or business intending to make a profit, rather than a living space.  

How to Buy Commercial Property

To ensure you get a healthy return on your investment, you must consider a number of factors before purchasing a piece of commercial property. Buying commercial property isn’t necessarily that different from buying residential property, but there is a lot more due diligence involved. 

  • Asses your available investment options – The first step is the easiest. Simply put, you need to determine the type of commercial property you need. This can be anything from an office building, retail storefront, warehouse, industrial facility, mixed-use building and so on  
  • Ready your financing - Before you begin searching for a commercial property, ensure you have the necessary funding. Buying a commercial property is usually done so using a commercial real estate loan. The type of commercial loan you’ll need will depend on the property/business. From there you will need to narrow down your lender options. Your business credit scores and reports will be reviewed, and in some cases your personal credit may be checked as well. 
  • Assemble Your Dream Team - A lot goes into buying commercial real estate and you will need the help experienced professionals to ensure the process runs smoothly. Millennium Properties’ experts can help you choose the perfect property for your needs and budget. With unmatched expertise in a variety of properties, from retail centers to warehouses to large apartment complexes, our brokers have experience across the commercial real estate market. 
  • Find a suitable property for your business – Once you’ve determined why you’re investing, secured your financing, and hired the right people, you can begin your actual search! Arguably the most exciting part of the process. Our experts will help you locate properties that meet your specific needs. Make sure you consider factors such as location and square footage. 
  • Research – Once you’ve found the ideal property, it’s time to do your due diligence. You can never know too much about the property you’re about to purchase. Ensure it’s zoned appropriately for your business and if it’s not, can you change this? Figure out what the property taxes are. Does the building need significant repairs? How much income/rent does the property currently earn? All of these are excellent questions to ask before signing on the dotted line.  
  • Make an offer & finalize the deal – Your agent will help you draw up an offer, but it’s also wise to have an attorney help you review it. You’ll also want a contingency clause, which is essentially an escape hatch should anything go wrong, such as a failed inspection or zoning issues. A survey may also need to be conducted which will provide information about the property’s boundaries, utility lines, etc. If all goes well, your team will shepherd you through the final steps of closing.  

Buying Commercial Property Vs Residential Property

Below are a few comparisons to consider between the efficiencies of commercial and residential properties. 

  • Commercial property value can be increased much easier. Local comps are taken into consideration, but the market value of a commercial property is based almost entirely on the amount of revenue generated by the business within the property. Whereas the value of residential properties is determined by the average value of similar properties in the area. 
  • Lease terms on commercial properties are often longer that those on residential properties. This translates to less turnover, lower vacancy rates and more reliable cash flow. 
  • Commercial real estate deals are usually much more complicated and costly, while residential deals are easier to finance. 
  • Residential properties tend to weather economic downturns with greater ease. When the market struggles, retailers and business owners are usually the first to struggle. Small business owners have a high failure rate, even under ideal economic conditions. 

Is Buying Commercial Property a Good Investment?

It’s not the easiest question to answer, but purchasing a commercial property for your business can be a very good investment. When the market slows, business owners are usually forced to pay higher rental costs, but purchasing a commercial property eliminates this concern and provides businesses with far more control over their overhead costs. Buying commercial property provides business owners with many benefits associated with investing including long-term appreciation. Depreciation is also a plus, which allows you to deduct a portion of your property's value from your taxable income every year.  

What to look for?

To ensure you make a wise investment, the first thing you need is a good real estate broker. An attentive, knowledgeable broker will help shepherd you through the process and ensure the best decisions are made throughout. We will provide a thorough analysis of your chosen property, including its current income, potential rents, expenses, etc. You will also need a lender. We can connect you with a number of great lenders including local, regional, and national banks, to obtain the necessary financing for your purchase. 

What is Your Investment strategy?

Depending on why you are buying a commercial property, the following are some of the investment strategies you can choose to employ when purchasing a commercial property. 

  • Bank loan:  This is when you take a loan from the bank to get capital to buy a commercial property and use the proceeds to pay it back. 
  • Fix and Flip: This is when you buy a commercial property, rehab it and add new upgrades before reselling it for a higher fee. 
  • Wholesaling: This is when you search for an irresistible deal, buy the property, and put it under contract. You will then sell the contract to other real estate investors. 
  • Owner-occupied:  It is when you invest in a commercial property with the sole aim of running your business in it. 
  • Passive investing: This is when you do not have the time to run a commercial facility, so buy one for passive income purposes. 

Will You Need a Lawyer?

Yes, you will need a lawyer. There are many reasons why you would need a lawyer when negotiating and ultimately buying property. Some of these include: 

  • Having a lawyer will be there to protect your best interest. They will ensure you are getting a fair deal, help with negotiations, prepare you for any unexpected scenarios and inform you of your rights throughout the process. 
  • There will be a lot of paperwork and contracts involved, and your lawyer will ensure all appropriate information is exchanged, signed, and readied. 
  • A lawyer will also help you communicate with the seller’s team effectively and in a timely manner. 
  • They will save you time. As a busy business owner, any added help will be a huge benefit to you.  

Buying Commercial Real Estate FAQ

Venturing into a new market can come with its challenges, and in the beginning, there will be more questions than answers. The following are some questions regarding buying commercial real estate that can help you make informed decisions. 

How do you determine the value of a commercial property?

There are three distinct methods you can use to determine the value of commercial real estate.   

  • Income approach:  You estimate the value of the commercial property using capitalization rate. The cap rate is the operating income of the commercial property divided by its current value. 
  • Replacement cost approach: You begin by considering the value of the land. Then how much you will spend when trying to build the same property. You will then add the two minus the depreciation value to find out the value of the property. 
  • Market value approach:  Also known as the sale comparison approach. It involves comparing the price of the real estate with properties of similar use and size. 

What are the types of commercial real estate properties?

There are a wide variety of different commercial property types, including but not limited to: 

  • Offices 
  • Hotels  
  • Bars and restaurants 
  • Manufacturing facilities 
  • Healthcare facilities 
  • Retail stores 

Why invest in commercial property over residential?

One advantage commercial real estate has over residential is the profit margin. Although being a residential landlord certainly comes with its own degree of profits, owning commercial real estate can have an even higher ROI. It will broaden your investment portfolio and may even open new doors to other investments in the future. 

Pros and Cons of Buying Commercial Property

Purchasing commercial real estate can prove to be a very good investment, but it has its share of risks. It’s always wise to weigh the pros and cons before diving into any expensive real estate transaction. 

Pros of Buying a Commercial Property 

  • Income potential: The main reason behind investors choosing to buy commercial real estate is the promise of substantial income. Depending on location, current economy, and other external factors, commercial properties generally have an annual return off the purchase price between 6-12%, which is much higher than that of single-family home properties (1-4%). 
  • Triple-net Leases: This lease-type you may utilize essentially means the property owner will not have to pay for many of the associated expenses. The tenant or lessee will handle all the payments, including repairs, maintenance, and taxes. All you will be responsible for as the buyer is securing and paying the mortgage on the property.  
  • Flexible Lease terms: There are fewer lease laws when it comes to commercial properties than with residential ones that come with various restrictions such as termination rules and deposit limits. 
  • Easy to evaluate price: It is generally much easier to estimate the cost of a commercial facility than a residential property. 

Cons of Buying a Commercial Property 

  • Time-consuming:  If you own a commercial property with ten businesses operating out of it, you will generally have a lot more responsibility than say, owning a single-family home. This added responsibility can become very time-consuming, which is why many property owners choose to hire professional property managers to handle maintenance and various other administrative tasks.  
  • Higher initial capital: Buying a commercial property typically requires a higher initial investment than that of residential property within the same area. Ongoing maintenance costs of a commercial property also tend to be higher.  
  • May prove risky:  Commercial business means more foot traffic and a greater possibility of accidents, damage, vandalism etc.  

While the above guidelines are meant to help navigate the often stressful and confusing process of buying commercial property, they’re no match for an industry professional’s first-hand experience and expertise. Our knowledgeable real estate experts can help you develop a customized plan for your portfolio and serve as a vital resource throughout the buying process. We’re dedicated to providing you with the highest level of service to meet your commercial real estate needs. Contact us to learn more about our services or to start hunting for that perfect property today! 

Anne Barer

About Ro Crawford

Ro has extensive background in several sectors of the Real Estate industry including residential and commercial assets. Ro is responsible for developing a comprehensive marketing plan for each property as well as managing the company’s social media accounts. She designs, writes and edits offering memorandums, press releases, proposals for new business, eblasts and more. For questions, comments, or suggestions related to our blog, you can contact us via our website.