So you’ve decided to expand your portfolio by investing in commercial real estate. You’ve studied commercial real estate, talked with investment advisors, and identified some likely investment properties. Congratulations on taking your first steps toward your new investment venture.
What you’ve learned, so far
Commercial and residential real estate are valued differently from each other. The income you derive from your commercial investment will be related to its usable square footage.
Commercial property can help you diversify risk when you have more than one tenant.
Cash flow may be greater. The yield on your commercial investment can be higher per square foot.
Cash flow stability may also be greater because commercial real estate leases are longer (generally) than residential property leases.
The bank values a commercial property differently from a residential property. You will need to work with a bank that works with commercial investment. And, most likely, that bank will want a higher down payment (as much as 30% or more).
Tips for buying commercial real estate
- Homework. You need to know about the “health” of your prospective commercial investment. These are some questions to ask:
What is the vacancy rate?
What do current tenants like/dislike about doing business in that area?
Do the tenants intend to renew their leases and how are their businesses doing?
- Plan of Action. Establish your parameters: how much can you afford to pay and how much do you expect/want to make on your investment? What is your exit strategy? Who are your partners in this investment? How many tenants are already in place and likely to renew their leases? How many vacant rental spaces need to be filled?
Assemble your team of experts – legal, tax, and financial advisors; a commercial realtor.
Create a list of prospective commercial investment properties.
Begin your search.
- Decision influencers
Location (it’s not just a residential property buzzword). What is the condition of the general area – depressed, growing, thriving? Visit the neighborhood yourself – don’t rely only on the impressions of others or the realtor’s description of the property and environment. Pay close attention to the number of vacancies in the surrounding in the neighborhood as well as in your property of interest.
Condition. What is the current condition of the property? Do you need to make major changes or repairs to the structure and grounds? Is everything about the property up to code?
Is the property in compliance with current zoning laws and development plans?
Do a title search “so you know the property is not compromised by any pre-existing agreement.”
Investing in commercial real estate is a time-consuming major undertaking and experienced investors say it takes plenty of patience. You should plan on spending a lot of time doing due diligence before reaching a decision and making an offer. Your effort and patience will be rewarded when you locate and purchase the commercial property that is right for your first investment.