Commercial property is a vast term that refers to any real estate property that is used for business purposes. This includes buildings that house businesses, land used for generating profit, and residential rental properties. Some examples of commercial property include office buildings, manufacturing shops, malls, and grocery stores.
Investing in commercial real estate (CRE) can be very lucrative, but the promising rewards require a lot of responsibility. If you are planning to buy a commercial property, it is crucial to practice due diligence and follow sound practices. In this article, we will guide you through the process of buying a commercial property and help you get started in this very profitable investment.
How to Buy Your First Commercial Property
Buying a commercial property is somewhat similar to purchasing traditional real estate but on a larger scale. In general, commercial properties equate to higher purchase price, longer lease, and higher rental income. To give you a better idea, here are the steps involved in the commercial real estate buying process:
There are a number different of strategies for buying commercial properties. Before you start buying commercial real estate, you need to ask yourself what you want to accomplish. From here, search for an investment to help you achieve that goal. Let’s take a closer look at these strategies:
This strategy involves buying larger tracts of land that are likely to be developed in the future and appreciate in value.
Commercial real estate development involved buying a raw piece of land and developing this into properties.
This is similar to residential fix-and-flip, when you buy commercial, make repairs, install upgrades, and then resell the property at a higher price.
This strategy involves finding a good deal on a commercial property, putting it under contract, then selling the contract to another investor or owner-occupant.
This strategy involves buying a commercial property and running your own business within that property.
BRRRR stands for buy, rehab, rent, refinance, and repeat. With this strategy, you buy an undervalued property with alternative financing, make improvements to it to increase its value and get it ready to be rented out, rent the property out to market standards, use a cash-out refinance to pay off your loan, and use profit left over from the cash-out refinance as a new down payment for your next investment property.
This strategy involves buying commercial property strictly for passive income.
It is in your best interest to assess and determine which type of commercial property you want to invest in. To help you with your decision, here’s a list of the different types of commercial real estate properties.
Commercial Office Spaces
Commercial office spaces are further categorized by class. Class A office spaces are high-end commercial properties that have undergone recent updates and are more competitively priced. Class B office spaces are priced less competitively and typically undergo renovation after purchase. Lastly, Class C office spaces are much older buildings, those that are over 20 years old, that require immediate maintenance.
Retail and Industrial Commercial Spaces
Retail commercial properties are used for the selling of products and services. Examples of these are malls, shopping centers, and retail stores. Industrial commercial properties are used to manufacture and distribute products. Examples of these are factories, plants, and warehouses.
Hospitality and Multi-Family Commercial Properties
Hospitality commercial real estate properties include hotels, motels, and short-term rentals. Multi-family commercial real estate buildings, on the other hand, are residential properties that include five or more dwelling units, such as apartment buildings and complexes.
It is important that you secure financing prior to looking for a commercial property to buy. This way, you will know how much you can afford. Also, having money on hand will enable you to facilitate a much faster deal.
Having the right professionals by your side could be the key to landing the deal of your dreams. It would be ideal to hire a commercial real estate agent that specializes in the type of property that you intend to buy. You can also benefit from the services of a commercial real estate attorney and a certified personal accountant, who can ensure that the deal goes according to plan.
A mentor will also play a crucial role in your commercial real estate investment. To start connecting with people who can help you make better decisions, attend real estate networking events within your area. Eventually, you will be able to build a connection, and their advice and insights would be of great help to you as you build a portfolio.
Now that everything is in place, you can begin your search for a commercial property that meets your criteria. Keep in mind the reason you are buying a commercial property and look for a property that will help you realize your goal.
Once you have started to identify potential commercial properties, visit them. Doing so can help you narrow down your options and will give you a better idea of what to expect if you decide to move forward with the deal.
When buying commercial real estate, practice due diligence. Look at the numbers and analyze the deal as a whole. Assess if the inherent risks are worth the potential rewards. Check if there is another property that could be better in enabling you to reach your goals. Make sure to analyze every detail and only move forward once you are completely sure that the property will be advantageous to you.
Once you find a commercial property that meets your criteria, the next step is to make an offer. It would be to your advantage to make an offer with an inspection contingency clause so, if the property does not pass the inspection, you can cancel the deal.