How To Buy Business Property
Residential property only includes single-family homes or those with up to four units. Usually, only families or individuals lease them. But commercial real estate (CRE) is generally for business purposes, including five or more units.
how to buy business property
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.
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.
Due diligence plays a crucial role in real estate investing. Essentially, this entails taking steps to ensure you meet all legal requirements while purchasing or selling the property. That involves fact-checking and assessing the property.
To start out with a disclaimer, buying a commercial property without money or experience is very difficult to do. Sure, this could be a breeze if you have an honest face and the ability to sell snow shovels in Hawaii. Otherwise, pitching your deal and having no track record or skin in the game is likely just to reward you with sour faces from investors and lenders.
As a commercial mortgage banker, my office gets calls every day from up-and-coming real estate investors who have nothing to contribute to their deal except enthusiasm. Most of these calls are just annoying. But over the past 24 years, I have assisted over 50 of these entrepreneurs who did not have any money or experience get their deals closed. Why? Because they found the right property, in the right place, at the right price with great value-add opportunities. This ensured that they could raise the cash and attract experience-rich private investors who could qualify for my loan.
1. The subject property is outstanding: You have found a commercial property to buy that has at least two of these four attributes (and if it has all four, I will drop everything to get your deal started): a) it is in a good neighborhood; b) it is priced below market for its condition; c) it already has enough net operating income (NOI) to cash flow the mortgage payments; d) the property has a strong repositioning upside. This can include rents that are already under market, a lower than market occupancy or the need for inexpensive operational and cosmetic changes that will enable rents to be raised.
6. Your pro forma shows strong financial returns: This is also a big one. After repositioning the property, investors need to get excited about the return on their investment. A minimum of 8% annual cash-on-cash return (CCR) is essential. Of course, 10%-12% is much better. More important is the annual internal rate of return (IRR). This is income from operations and appreciation combined. Commercial properties almost always earn more from appreciation than operations.
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.
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.
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.
Visit Properties: As you start identifying potential properties, make sure to visit each of them. This will give you a better idea of what to expect if you choose to move forward with the deal. Even if you do not plan on managing the property yourself, it is still a good idea to picture what the building will be like. Visiting properties can help you narrow down your options if you have more than one investment you are trying to choose between.
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. 041b061a72