Are you considering buying a commercial property for your business or investment needs? Purchasing commercial real estate can be a complex process, but it also offers substantial potential profits. In fact, returns are often higher in commercial real estate compared to residential properties. If you're ready to explore this exciting opportunity, RentPrep is here to guide you through the process.
A Table of Contents on Purchasing Commercial Property
Before diving into the steps of buying commercial properties, let's take a quick look at what you'll learn in this guide:
- What is considered commercial real estate?
- Types of commercial properties
- How to buy commercial properties: A step-by-step guide
- FAQs about buying commercial properties
- Next steps to start your commercial property journey
What is Considered Commercial Real Estate?
Commercial real estate (CRE) encompasses a wide range of properties used for business purposes. This includes office spaces, industrial buildings, and even apartment buildings with more than four units. It's important to note that the lease agreement for individual units within such buildings is residential, while the agreement between the property owner and building owner is commercial.
Types of Properties
There are five main types of commercial properties you can invest in:
- Multifamily residential properties (e.g., apartment buildings, duplexes)
- Office spaces (e.g., high-rises, medical offices)
- Retail spaces (e.g., stores, services)
- Industrial properties (e.g., warehouses, packing facilities)
- Hospitality properties (e.g., hotels, short-term rentals)
You have the flexibility to invest in multiple types of commercial properties or focus on a single type that aligns with your goals.
How to Buy Commercial Properties: A Step-By-Step Guide
Now that you understand the basics of commercial properties, let's explore the step-by-step process of buying commercial real estate. Even if you're new to this field, don't worry. RentPrep is here to support you every step of the way.
Step 1: Business Development, Investing, and More: Why Are You Buying?
Before diving into the purchasing process, it's crucial to determine your goals and investment strategy. What motivates you to invest in commercial real estate? Understanding your objectives will help you make informed decisions throughout the buying process.
There are several types of commercial property investments, including land banking, development, flipping, wholesaling, BRRRR (buy, rehab, rent, refinance, repeat), passive investing, and owner-occupied properties. Take time to research and develop your business ideas before moving forward.
Step 2: How Will You Fund the Purchase?
Once you have a clear vision of your investment goals, it's important to evaluate how you will finance your commercial property purchase. Compare lenders to secure favorable financing terms. Remember to consider your credit score, fees, and penalties associated with the loan.
Common loan types used in commercial investments include permanent loans, FHA loans, SBA loans, bridge loans, and hard money loans. Be prepared to provide thorough documentation about your financial background, assets, and plans for the property when applying for a business loan.
Step 3: Who Will Help You?
Unlike residential investments, commercial real estate often requires a team of professionals to ensure success. Surround yourself with individuals who can assist you in achieving your goals, even if these relationships are not formalized contracts.
Essential team members for commercial investors include a real estate agent, preferably with a degree in business or finance, an attorney familiar with contract law and commercial leases, an accountant specializing in commercial account management, a mortgage broker with strong lender connections, a reliable contractor experienced in commercial properties, and a property manager to handle day-to-day tasks such as rent collection and property maintenance.
Step 4: What Do the Numbers Look Like?
Analyzing the financial aspects of each potential investment property is crucial. Consider the cost of investment, potential income, the number of units, industry trends, and growth-to-cost ratios. This analysis will help you make informed decisions and identify properties that align with your investment strategy.
Compare each property to similar ones in the market. Evaluate the property's value and the cost of potential repairs or improvements. This comprehensive approach will enable you to make better investment choices and increase your chances of success.
Step 5: What Type of Deal Will You Offer?
Making an offer on a commercial property can be nerve-wracking, especially for first-time buyers. However, with the support of an experienced team, you can navigate this process smoothly. Work with your attorney, broker, and real estate agent to prepare a letter of intent and a purchase and sale agreement. These documents will outline your terms and conditions, which will be submitted to the seller for negotiation.
Step 6: Keep Learning
No matter how much you know about buying commercial properties, it's essential to continue educating yourself. Stay updated on the latest industry news, landlord guides, and investment information by subscribing to RentPrep's newsletter and accessing our valuable resources. The rental industry is constantly evolving, but with our support and your ingenuity, you'll stay ahead of the curve and achieve exponential growth.
How to Buy Commercial Properties: FAQs
While this guide covers many key points of buying commercial properties, it's natural to have more questions. Here are answers to some frequently asked questions:
How do I know more about commercial property investing?
The best way to learn about commercial property investing is through a combination of research and experience. Start by reading informative books, listening to real estate investment podcasts, watching YouTube videos, and connecting with other investors online or in your area. Join investor groups and consider working at an investment group to gain practical experience. As you continue to learn and gain confidence, you'll be ready to view properties, underwrite deals, and make informed purchasing decisions.
How can I calculate the value of potential commercial deals?
Calculating the value of commercial properties can be challenging but essential for investment success. Many investors develop personalized spreadsheets to analyze data such as property value and predicted rent. These tools allow you to quickly determine if a property is worth considering. Additionally, some investors use formulas based on the asking price per square foot and potential rental price per square foot to evaluate potential deals efficiently.
What is underwriting in commercial real estate?
Underwriting is the process of analyzing financial assets to determine the risk associated with giving a loan. Practicing underwriting will help you evaluate if an investment makes sense. By reviewing property pros and cons, you can decide whether a property aligns with your investment criteria before approaching a lender. Regularly underwriting deals will help you gain expertise and make smarter investment decisions.
Buying a Business Property: Start Your Next Steps Now
Now that you have a comprehensive understanding of purchasing commercial properties, it's time to take the next steps towards your investment journey. Start by researching each type of commercial property and strategy to identify the best fit for your investment interests. Also, connect with professionals such as attorneys, agents, property managers, and bankers who will play a vital role in your process. Finally, study underwriting, investment strategy, and your local commercial market to make informed decisions.
By following these steps, you'll be well-prepared to make intelligent decisions from day one. As your knowledge grows and you continue to learn, you'll be ready to purchase your first commercial property sooner than you think.
