Buying Commercial Property: Tips for Beginners
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Buying a commercial building is a big investment. After all, buying a commercial property isn’t the same as buying a home. Typically, there is more money and more responsibility involved.
A successful commercial property investment begins with a thorough understanding of commercial real estate. In this article, we’ll explain what a commercial property is, why it may be a better investment than residential real estate, and the types of commercial properties.
What Is Commercial Real Estate
Commercial real estate is a term used to refer to properties that are used for business purposes. Opposite to residential real estate which is used as a living space, commercial properties provide a workspace. In general, investors opt for commercial property for income, although some investors might prefer to buy commercial real estate for personal use.
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Commercial real estate is usually divided into four main categories:
Office space: They include urban and suburban office buildings and usually cater to multiple tenants. Skyscrapers and high-rise properties are examples of urban office buildings.
Retail: This type of commercial real estate compromises properties such as restaurants and shops.
Industrial: Industrial buildings include bulk warehouses, heavy manufacturing, or light assembly. You’ll usually find them outside the city center.
Hospitality: Establishments that provide service to tourists and travelers fall under this category.
How To Buy Commercial Property
Buying commercial property is different than buying residential real estate, both strategically and financially. The costs are usually higher with commercial properties and investors might find it hard to secure funds. Plus, if the commercial property you’re planning to invest in doesn’t have any tenants, you’ll need to pay for the expenses yourself until you find one.
When you buy residential real estate and want to compare prices, it’s easy to benchmark. However, this is not easy with commercial properties as comparable properties may not be available. This is why there are some points you should take into consideration before completing a commercial property acquisition.
Define Your Goals
Purchasing commercial real estate can be a profitable investment, however, if you don’t do detailed planning, you might fail. Before committing yourself to the idea of buying commercial real estate think about your main motivation. Are you going to buy a commercial property just to achieve your short-term financial goals? What is your long-term plan? Are you buying a property just to rent it out or are you going to use it for yourself? If you feel like you’re losing direction, you can consider getting professional help from property advisors.
Comparing lenders even before you decide on a property is crucial. Get quotes from different banks and compare the rates. Don’t settle on one bank before you know what the interests rates are with the other. Also, inquire about the late fees.
Work With Professionals
Working with professionals is important when you’re making any type of investment but it’s vital if this is going to be your first commercial property investment. Make sure you have a team of experts, such as a lawyer, accountant, and reliable real estate agent. Once you decide on the property, you can also consider working with a property management company.
Do a Thorough Location Search
Location is an essential part of real estate investment, either residential or commercial. But if your main goal in buying commercial real estate is rental income, location becomes more essential. If your priority is a retail space, you’d better look into prime locations which get more demand and cost more. Another option is to look into less popular, but promising locations where new development projects are being planned.
Run a Due Diligence
When you’re making a commercial property investment, you need to make sure that the property meets all legal requirements. Checking the deed is essential as this might cause problems if it’s registered as residential, rather than commercial. This emphasizes the importance of working with professionals who will help you during the due diligence process.
Benefits and Drawbacks of Commercial Property Investment
Buying a commercial property, whether as an investment or for your personal use, can be a good decision. In either case, it’s critical to know what you’re getting yourself into. By assessing the benefits and drawbacks, you’ll be one step closer to making the right decision.
A Stable Income: Generator Commercial properties often yield a greater yearly return than residential properties, which is ideal if you’re seeking a high-yielding investment. Furthermore, purchasing a commercial facility with tenants already in place eliminates the need to wait for the income flow to begin.
Capital Appreciation: Commercial real estate, not only provides a reliable source of income, but it also has the potential for capital appreciation if it is well-maintained. This is one one the main reasons most investors add commercial real estate into their portfolios.
Professional Relationships: With Tenants Tenants of commercial properties are typically businesses rather than individuals. As a result, the owner-tenant relationship will differ significantly from that of a residential lease. A business will be more motivated to keep the property because it is directly linked to its overall brand image. This is why it’s less likely that you’re going to face issues that would arise from the residential lease.
Objective Price Evaluations: Commercial property prices are usually easier to assess than residential property prices as you can request the existing owner to present income statements. This will help you to figure out the right price.
Maintenance Issues: Most commercial property owners prefer to work with property management companies as emergencies and repairs might be difficult to handle. This is why you need to factor in property management expenses before committing to an investment. Most property management companies can charge up to 10 percent of the rent revenues.
More Initial Investment: Acquiring a commercial property generally requires more capital upfront than acquiring a residential rental in the same area. Also, buying a commercial property comes with large capital expenditures, and you’re going to be expected to pay management fees or repair costs even before you have a regular income.
More Risks Involved: Commercial properties are more prone to damage, as they attract more visitors on a daily basis and major accidents can happen. Cars might do harm, people can get injured, or the building’s sides can be spray-painted by vandals. Make sure you understand the potential risks involved and the coverage of your property insurance.
Time Commitment: You have much more to handle with a commercial retail complex with five customers, or even just a couple, compared you do with a residential venture. You can't be an absentee owner and expect to make a good profit.
- The term “commercial real estate” refers to properties that are used for business or to generate money.
- Office space, industrial, hospitality establishments, and retail are the four basic types of commercial real estate.
- Commercial real estate provides a stable rental income.
- Investing in commercial real estate requires a thorough search and more capital from investors than investing in residential real estate.
The process of making commercial real estate investments isn’t easy. You need the find the ideal location, work with the right professionals, and make sure the agreement is a favorable one. However, commercial properties are usually profitable investments that promise better returns than average real estate. Good luck with your search.
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