The Commercial Pinnacle: Your Guide to Investing in Commercial Real Estate
The 32nd president of the United States, Franklin D. Roosevelt, once said that “real estate… when paid for in full, and managed with reasonable care, is … the safest investment in the world”. His quote is meaningful to those investing in real estate, especially commercial real estate. To invest effectively, it is imperative to understand the nuances of commercial real estate. All professionals in this business will boast about the substantial income and spendable cash, the properties’ appreciative value, accumulate significant equity and cash flow through leverage, a potential hedge against inflation, unique security advantage, and tax benefits. In addition, there will be plenty of property managers to handle your investments.
There are several questions that need to be asked prior to investment. As an investor, you should be asking the following:
- What are the market disruptors?
- What criteria do you need to evaluate properties?
- What makes them unique?
- Which ones are best?
It is important to have a game plan on how to evaluate commercial property deals – here are some tips on how to find the right deal.
Know your Space
To be successful in this area, you need to know your market and any potential disruptors. Market disruptors are important – this includes any technological shifts or advancements, increased competition, investing in potential data that allow the purchaser to make informed decisions, areas of increased STEM talent and competition, potential areas for distribution and fulfillment, and mobility patterns of tenants
Commercial Real Estate vs. Residential Real Estate
The valuation of commercial real estate is different from residential real estate. The key difference is that commercial real estate relies on square footage to generate income. Also, its important to note that multiple unit properties are more lucrative compared to a single family house – that is because the commercial property leases are longer and creates greater cash flow
Purchasing Real Estate
Make sure to have your team of experts – this includes an accountant, lawyer, commercial broker, and mortgage broker. An accountant is needed to sort through your business’ affordability and analyze any tax implications and/or operating budget benefits. The lawyer is required to complete the transaction, negotiate with the seller, and act as the lender on your behalf. A real estate broker could support you on identifying the potential properties and analyze at your price range. Having a mortgage broker is key for obtaining good financing options and bank loans guaranteed through U.S. SBA.
Finding the Right Property
Everyone understands that location is the most important factors when considering for the right commercial property, but that is only one criteria when looking at real estate. The following criteria is important to consider:
- Location – As mentioned earlier, the area of increased STEM competition is a good example of location since many of those areas innovate and always expand for commercial real estate. Therefore, it is important to understand the businesses that reside in the location for your commercial real estate.
- Condition of Property – This is important as you want to understand any type of liability issue such as environmental issues, wear and tear of property – just expect the unexpected.
- Uses – Before investing in commercial real estate, understand the uses for it – will it be for manufacturing or an office space? Therefore, it is necessary to understand the zoning and make sure it is compliant for your commercial real estate uses.
- Limitations – Limitations goes hand in hand with uses – it is important to understand zoning and make sure your property is compliant
- Access – It is important your commercial real estate understands the needs of the customers – is it accessible to everyone? Is there enough parking to accommodate everyone using your property?
- Opportunity to expand – It is worthwhile to have extra space, in case you want to develop your property further and expand your business
Making the Purchase: Due Diligence and Evaluating the Property
Once you’ve identified your dream commercial real estate property, it is important to understand how this property fits into the broader scheme of your specific needs and goals. It is important to tap into your team of experts as mentioned earlier. A broker will bring in their trusted associates to help appraise your potential property as well as identify any potential issues within your property such as its condition, liability issues, and structural dependability. In addition, it is important to have a title company evaluate for any prior or existing litigation that may affect the property
Making the Purchase
Once you have evaluated the property and identified the issues, the next step is to identify your financing needs. There will be plenty of attractive financing options, it is best to receive advice from your team of experts especially your accountant and lawyer. Your accountant will identify the right financing for your short term and long term goals and your lawyer will develop the best contract that is structured for the best deal you can receive. The contract is the most important part of the commercial real estate deal as you will cover every nuance including compliance including zoning, financing options, any existing tenant leases, and tax requirements. As the old adage says “time is money”, it is important to act quickly and execute your plan accordingly. Be sure to understand and be strategic about any issues that may arise in the next 12 to 24 months prior to closing the deal. Communication is key throughout this process and best wishes on a successful real estate deal.