1. Ask yourself a lot of questions
The first step in purchasing commercial real estate is knowing what you want! It is imperative that you enter the process knowing yourself, your situation, and what you’re looking for.
A few questions that you should ask yourself before you begin your search are:
- What kind of location do you need?
- What kind of property are you looking for?
- Do you need to buy or could you lease the property?
- What’s your situation regarding cash, financing, and/or ability to make a down payment?
- How much time can you commit to the property?
- How much work are you willing to put into the property?
2. Learn some commercial real estate vocabulary
A lot of acronyms and vocabulary exist in commercial real estate that most people are unfamiliar with. Knowing any of these terms will make working with people in the commercial real estate industry much easier.
Here are some common terms to get started with:
- Loan-To-Value (LTV): A ratio of how much money you’re asking from a lender vs. the total value of what you want to purchase.
- Cash on Cash: Annual income over how much you actually invested. The amount invested could be just the amount your down payment was.
- Capitalization Rate (Cap Rate): Income of the property divided by the total value of the property.
- Ad Valorem: A tax based on the assessed value of a piece of property.
These are just some of the terms to be familiar with — City Feet has a great glossary of more commercial real estate vocabulary.
3. Visit and consider many properties.
Do your homework on each! Tour as many different properties as possible. Commercial deals take longer than houses do. They take longer to purchase, renovate, and get sold, so take your time during your search! Don’t rush anything.
Figure out what works and what doesn’t about each of them for you. Consider the most important things for each one including price, location, condition, and allowed uses.
The importance of location can’t be emphasized enough. Properties located near universities, hospitals, or downtown areas will generally have a higher value and will sell quickly.
Above all, you’re searching for a “match” with your property. Your situation and needs are unique. Here is an extensive checklist of helpful questions to ask while touring properties.
4. Find the experts.
Buying commercial real estate can be a very complex process. It will be helpful and beneficial for you to hire experts to help you work through some of the steps. What kind of experts and how many depends largely on the type of property that you’re purchasing. At the very least, you’ll need to hire an accountant, to discuss the financial aspects and options of buying commercial real estate. A commercial real estate lawyer, to help you draw up any contracts pertaining to buying or leasing a property. A commercial realtor, who will alert you to viable properties in the area. And lastly, a mortgage broker, who will work with you to obtain the necessary funding for your real estate investment.
Some properties can be more complicated and may require other specialists like tax experts, notaries, appraisers, engineers, and/or environmental specialists.
5. Figure out your financing
If you’re like most people, you’ll need to get some financing help to be able to purchase the property. What type of banks, credit unions or other home mortgage company could you use? What kind of credit do you have and what kind of interest rate could they give you? Answering those questions will put you on the right track for the financing process.