Purchasing Commercial Real Estate: Tips of the Trade

Whether you need a spot to house your business or are simply looking for an extra revenue stream, a commercial property can be the answer.

However, buying commercial real estate isn’t the same as buying a residential home. It takes careful consideration to find the right property, the right financing and the right deal – and even the most experienced buyers don’t always meet with success. Do you want to make sure you’re on the right track when considering purchasing commercial real estate? Need some tips that can help you achieve your investment goals? You’ve come to the right place.

Key takeaways

1. Investing in commercial property can bring you a consistent stream of income, and allows you take advantage of various tax breaks.
2. One of the biggest risks is property maintenance costs. Make sure you’re investing in a well-kept-up property. If it isn’t, make sure you get a good price that allows you to cover costs.
3. You always have the option of jumping out of the commercial property game through seller financing, which will provide a steady stream of income without the hassle of property ownership.
4. Commercial property isn’t as in-demand as housing, so look around for motivated sellers. You might get a good bargain.

Benefits of purchasing commercial real estate

The biggest benefit of investing in commercial property is the revenue stream it can provide – that is if you’ve chosen the right property. Well-placed multi-family dwellings, strip centers, hotels, and shopping malls can all provide regular, consistent streams of income well into the future if purchased at the right time and price.

Holding commercial real estate can also qualify you for various tax breaks. There are capital gains tax advantages, deductions for business expenses, mortgage interest and property taxes, and other incentives that can lower your tax burden year after year.

As with any real estate purchase, a commercial property also affords you the chance to build equity. When your equity is high and property valuations are up in the area, you can sell the structure for a profit and see significant returns on your investment. You may also seek a quick infusion of cash by selling real estate notes of the property to an interested note buyer.

Potential pitfalls of buying commercial property

As with anything, there are a few downsides to owning commercial real estate. One of the biggest pitfalls of buying commercial property is the potential repairs and maintenance expenses. Always have a full building inspection done to ensure you’re investing in a well-cared for and up-to-code property, and make sure to have some room in your budget for regular repairs, upkeep, and other expenses.

Having a rainy day fund for unexpected costs can help, too. If that is not the case, and the property is in need of major repairs, make sure you get the property at the right price. Do not overpay!

Just as the housing market ebbs and flows, so does the market for commercial properties. In the event you’re tired of managing your property or you just want to cash in on the equity you’ve earned, you might find it hard to do so should the timing be wrong.

Fortunately, note buyers exist to offer another option and a faster exit strategy if you decide to sell the commercial property through seller financing to keep your ongoing yield and monthly income intact.

When you buy commercial real estate, another downside is that it requires a lot of time, cash and resources. In most cases, lenders require at least 30% down on a commercial purchase – which can be a significant chunk of change on an already high commercial listing price. Throw in the time and resources you need to keep the property maintained and cared for, and that can be a lot to take on for a busy investor.

Purchasing commercial real estate tips to put into action

So how can you avoid these pitfalls of buying commercial property and start off on the right foot? Your first step is to map it out. What can you afford to spend up front? What can you afford to spend monthly – on your mortgage and on your expenses? What are your goals for the property and how much income can the structure generate?

Make sure the numbers work in your favor before buying a commercial property, so work with a reputable commercial agent if you don’t have all the info you need.

Here are some additional purchasing commercial real estate tips that can help:

Always have an exit strategy. You don’t want to get stuck in a bad deal, so you’ll always need an exit strategy in place in case something goes south. If lots of repairs are necessary, will you offload the property to someone who can flip and rehab it? Will you demolish and liquidate? Will you sell to a note buyer or seller-finance to get out of the daily management of the property? It helps to have an inspection, agent, and legal partners you can count on to provide you honest feedback from the start. They may be able to prevent surprises from throwing you off track.

Know your metrics. You need to know how to calculate your successes or failures as a commercial real estate investor. What’s your net operating income (NOI)? Your cap rate? Your cash on cash? Use these metrics to determine if your investment’s a viable one – and continue doing so years after you own it.

Check out the neighborhood. Really want to know how a commercial property is going to perform? Take a spin around the neighborhood. If you’re investing in condos or multi-family housing, stop by open houses to see what demand is like. If you’re opening space for offices or small businesses, drive around and scope out the competition. You can even talk to other neighborhood business and property owners for an unfettered opinion.

Look for sellers who are motivated. Housing might be hot, but commercial real estate isn’t in as high demand. That means there are plenty of motivated sellers willing to negotiate a lower price to move properties off their portfolio. Don’t be afraid to haggle a bit or wait for a better deal to come around. Just be sure you evaluate the property fully before diving in. Remember: if it seems too good to be true, it probably is.

If you’re in need of additional purchasing commercial real estate tips, you can also look to an experienced real estate attorney for help. They can guide you toward the right investment strategy and help ensure your transaction goes off without a hitch.

Using seller financing to purchase or sell commercial real estate

If you’re thinking of investing in commercial property and are worried about the stringent application requirements of traditional lenders, you may want to talk to the seller about structuring a seller-financed deal. This positions them as the lender, of sorts, and allows the sale to go through quicker and with less red tape. The seller can then offload that mortgage loan to a note buyer, thus getting the loan and property burden off their shoulders entirely.

You can also use seller financing as a way to offload the property down the line, should it prove unsuccessful for your goals. To learn more about seller financing or note buying, see these tips.