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Robert Gomez
Robert Gomez

Steps To Buying Commercial Real Estate REPACK

A commercial property may be a good investment, but it depends on a number of factors, such as whether or not you can afford to buy the property, what kind of returns you can expect from the property, its location, and more. Overall, commercial real estate investments tend to have a good rate of return, and can be an easier investment than others because they generate passive income.

steps to buying commercial real estate

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If you have little or no money to invest in real estate, real estate investment trusts (REITs) may be a good option, because they work as a sort of aggregator, allowing multiple investors to invest in several properties and make money off of dividends.

Residential property only includes single-family homes or those with up to four units. Usually, only families or individuals lease them. But commercial real estate (CRE) is generally for business purposes, including five or more units.

Sometimes, investors benefit from real estate in more ways than just financially. Others purchase a property for personal use. One method is the owner-occupied commercial real estate (OOCRE) investment strategy. In this, the owner uses the property to conduct business operations.

Due diligence plays a crucial role in real estate investing. Essentially, this entails taking steps to ensure you meet all legal requirements while purchasing or selling the property. That involves fact-checking and assessing the property.

As you might expect, commercial properties are a departure from traditional single-family investments. From crunching numbers to raising capital, buying commercial real estate requires more of an investor. That said, with the right dedication, you can learn how to take on more complex properties. The following guide will walk you through buying commercial real estate and help you get started today.

Commercial property is any real estate property that is specifically used for business purposes. Commercial property is defined as buildings that house businesses, land with a primary purpose of generating profit, and residential rental properties. Using a building as a commercial property affects financing on the property, tax treatment, and specified laws on the building.

Industrial, commercial real estate spaces are factories, plants, or warehouses used to manufacture and distribute products. On the other hand, retail commercial spaces are used for the selling of products and services. These can be malls, shopping centers, or stores.

Hospitality commercial real estate includes hotels, motels, and even some forms of short-term rentals. Finally, multifamily commercial real estate buildings are residential properties that include five or more dwelling units such as apartment buildings and complexes.

Buying commercial properties can be thought of similarly to purchasing traditional real estate, but on a bigger scale. Investors will still need to conduct sufficient research and mind due diligence, but there will be differences in the numbers. Commercial properties often equate to higher purchase prices, longer leases, and increased rental income. To prepare for these differences, investors should ensure they have the right systems in place. Not surprisingly, as you gain experience, you will become more comfortable analyzing properties and landing deals.

Commercial real estate is a broad term and can include retail shops, industrial complexes, office buildings, large apartment buildings, and many other commercial real estate types. In other words, commercial real estate is property used for business purposes. Therefore, it is in your best interest to determine which type of commercial real estate you want to deal in. To help you with your decision, remember why you are investing in the first place.

There are numerous financing methods to choose from, ranging from a commercial real estate loan to hard money lending. It is not uncommon to utilize more than one source of funding for a commercial deal. Depending on the specific property, you can tap into a small business loan, apartment loan, or even seller financing. Each of these options will come with unique loan terms and interest rates, so weigh your options carefully.

Yes, buying commercial property has proven to be a smart investment for those who know what to expect. The income potential alone is what draws so many real estate investors to this asset type. Commercial real estate is known to have a higher return on investment when compared to residential properties. Besides profitability, buying commercial real estate can also lead to stronger professional relationships, more flexible lease terms, and limited business hours. Investors who opt for commercial real estate will also enjoy attractive financing options and equity appreciation.

At this point, you may still have questions about commercial real estate, and that is okay. Learning to take on more complex investing strategies takes time and research. If you still have questions on how to buy commercial property, there are resources you can use. The following questions about buying commercial real estate can help:

Commercial real estate represents a lot more than simply shipping centers and restaurants. These properties can be anything from retail stores to hotels and office buildings and many things in between. As such, each commercial property is most likely zoned according to its purpose, and that zoning is important for you to pay attention to. Perhaps even more importantly, the zoning will determine what you can do with the property if you buy it, so be aware. Make certain the zoning laws fit with your strategy.

Commercial real estate boasts one benefit that single-family homes have a hard time matching: the value of scale. Due to the sheer size of most commercial buildings, at least as they compare to traditional homes, commercial buildings offer the potential for larger profits. It is also nice knowing most of your tenants will have a vested interest in the property, which means you are less likely to deal with unruly tenants. Business owners are typically more inclined to treat the property with respect because it is, after all, their own livelihood.

Learn The Language: There can be a learning curve when making the transition from residential to commercial real estate, so you may need to go back to basics before you get started. Familiarize yourself with terms and concepts commonly used in commercial real estate, like capitalization rate and building classification. Reviewing the language will help make sure you are comfortable talking to potential business partners, tenants, and lenders.

Work With Your Mentor: A mentor is crucial for any real estate investor, but it can be beneficial when it comes to more complex investing strategies like commercial properties. Attend real estate networking events in your area or ask your existing connections to meet someone with commercial investing experience. As you build a relationship over time, their advice and insights could help as you build a portfolio.

There may come a time when your real estate investing business outgrows your home office or rental space. These growing pains can slow down business operations by preventing owners from hiring new employees, taking on new deals, and earning certain financial benefits. The next logical step is typically to purchase a commercial space for the business itself when the time comes. In fact, according to a study from Bank of America, the small business sector occupies 30 to 50 percent of all commercial real estate spaces. However, many business owners get stuck on one main question: how do you find the right commercial property for your own business?

In essence, underwriting commercial real estate is a great way to determine the profitability of a given deal with your financing, property, and market in mind. It is a good idea to create a spreadsheet to quickly calculate and record your numbers. As you analyze and tackle more commercial deals, you will find the underwriting process that works for you. In time, you can develop a foolproof system for deciding on the right investment properties for your portfolio.

The Certified Commercial Investment Member (CCIM) Institute offers coursework on the commercial investing process. The CCIM Certification is taught by leaders in the real estate industry, and is aimed at investors, brokers, agents, and other professionals in the industry. The coursework teaches various methodologies for evaluating and underwriting commercial deals. While the CCIM Certification is not an industry standard by any means, it is one route to bolster your credentials, learn about the industry, and eventually expand your investment portfolio.

Buying commercial real estate can certainly be well worth your time if you do it correctly. Savvy commercial real estate investors have already proven that it belongs in a well-rounded portfolio, but I digress. For as beneficial as it can be to own commercial real estate, it can be equally devastating for those that go in without a plan. If for nothing else, buying commercial property comes with risks for those that act irrationally. Poor investment practices could result in devastating problems, and the size of commercial investments only magnifies them. Therefore, it pays to have a sound plan in place. With proven systems on your side, you are more likely to avoid the pitfalls of commercial investing and realize success.

To start out with a disclaimer, buying a commercial property without money or experience is very difficult to do. Sure, this could be a breeze if you have an honest face and the ability to sell snow shovels in Hawaii. Otherwise, pitching your deal and having no track record or skin in the game is likely just to reward you with sour faces from investors and lenders.

As a commercial mortgage banker, my office gets calls every day from up-and-coming real estate investors who have nothing to contribute to their deal except enthusiasm. Most of these calls are just annoying. But over the past 24 years, I have assisted over 50 of these entrepreneurs who did not have any money or experience get their deals closed. Why? Because they found the right property, in the right place, at the right price with great value-add opportunities. This ensured that they could raise the cash and attract experience-rich private investors who could qualify for my loan. 041b061a72


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