How to Buy Commercial Property

There are both pros and cons to investing in commercial property. Commercial properties typically provide more financial rewards (steady cash flow, tax benefits, etc.) than single-family investment properties but are also more complicated and require more from the investor. Therefore, proper planning and due diligence are essential to your success as a commercial property investor. 

What is Commercial Property?

“Commercial property is real estate that is used for business activities. Commercial property usually refers to buildings that house businesses, but can also refer to land used to generate a profit, as well as large residential rental properties,” Investopedia explains. “The designation of a property as a commercial property has implications for how it is financed, how it is taxed, and how the laws are applied to it.”

Commercial vs Residential Real Estate

Whereas residential real estate includes properties where individuals live (single-family homes, condos, townhomes), commercial real estate includes properties where businesses or corporations do business (offices, retail spaces, manufacturing properties). Larger apartment buildings are also considered commercial.

Here are some differences to consider when investing in commercial property:

• Purchase Price - Commercial real estate tends to cost more to purchase than residential real estate.
• Financing - Financing commercial real estate can be more difficult and expensive than financing residential real estate.
• Taxes - You must pay taxes on both commercial and residential real estate; however, they are taxed differently.
• Lease Terms - Most commercial real estate leases are two years or more, whereas residential ones are usually one year.
• Property Management - Typically, commercial real estate management is more complicated, requires more personnel, and is more expensive than residential real estate management.
• Selling Time - With a smaller buying pool, commercial real estate typically takes longer to sell than residential real estate.
• Tenants - Commercial tenants are usually businesses or corporations and are more likely to follow your rules and respect your property.
• Property Value - The value of a commercial property is based on the revenue the property can generate; therefore, the right tenant can quickly increase the value of a commercial property.
• ROI - ROI can vary, but typically, commercial real estate yields a higher cash flow and ROI.

How to Buy Commercial Property

Educate Yourself

You can’t beat experience when it comes to investing in commercial property, but if you’re starting out, educating yourself is the next best thing. Read commercial real estate books, listen to podcasts, watch YouTube videos, talk to other investors, and join real estate investing groups to learn as much as you can about the ins and outs of commercial real estate.

Build a Team of Experts

It’s impossible to be an expert in everything, so you must build a team of experts who can provide guidance, answer your questions, and help you as you proceed. Experts to have in your corner may include the following:

• A Commercial real estate agent
• A commercial real estate attorney
• A contractor that specializes in commercial real estate
• A commercial management company
• A commercial lender

Determine Your Investment Strategy

First, determine what you want to accomplish and then find an investment strategy to help you achieve your goal. Here are some investment strategies to consider:

• Land Banking – Buying large tracts of land to be developed in the future.
• Commercial BRRR (Aka Value-Add) – BRRR stands for Buy Rehab Rent Refinance Repeat. FinanceLobby explains, “With this approach, investors purchase and renovate a foreclosed property, rent it out, complete a cash-out refinance, and then repeat the process by purchasing a different rental property with the proceeds.”
• Development – Buying land and constructing a commercial property on it.
• Buy and Hold – A long-term investment property wherein the investor purchases a commercial property and rents it out.
• Fix and Flip – Buying a commercial property, fixing it up, and reselling it at a higher price.
• Owner-Occupied – Buying a commercial property to run your business in.

Decide What Type of Property 

There are basically five types of commercial real estate:

• Office – The most common type of commercial real estate, office buildings can range from a single office to a skyscraper with hundreds of offices.
• Retail – Retail properties can include stores, banks, restaurants, etc., ranging from a small structure to an entire strip mall.
• Industrial – Industrial properties include warehouses and manufacturing facilities.
• Multi-family – Although people live in multi-family properties, large apartment complexes are considered commercial properties.
• Special purpose – Special purpose commercial real estate includes schools, student housing, hospitality, sports stadiums, government, self-storage facilities, and religious properties.
  

Mixed-use properties include both commercial and residential. For example, a building with a restaurant on the first floor and one or more apartments on the second floor is considered a mixed-use property.

Secure Financing

Secure financing before you start looking for a property so you’ll know what you can afford and can expedite the deal once you find the property you want to purchase. You can utilize multiple funding sources, such as a traditional bank loan, Fannie Mae/Freddie Mac loan, CMBS loans, crowdfunding, private equity, etc.

Search for Property

Once you’ve done your research, determined your goals, etc., it’s time to work with an experienced real estate agent to help you find the right property to help you accomplish your goals.

Make an Offer

Once you have found a property that meets your criteria and will help you accomplish your goals, you must submit an offer. An experienced real estate agent can help you determine a fair price.

How to Find the Right Commercial Property

Pete Heim can help you find the right commercial property in Berks County and beyond. He has over thirty-five years of real estate experience and more than two hundred 5-star independent customer ratings!

Contact Pete and his team today at 610-745-3378 or 610-898-1441 or connect with him online.