10 things to consider before buying commercial property

Investing in commercial real estate can be a profitable business, as these properties generally offer potentially higher financial returns than residential properties.

However, with greater rewards comes greater risk for investors.

There is always the risk that a bustling place today will become a ghost town in a few years. In addition, your cash flow may suffer due to expensive repairs, tenants not paying rent, etc. It can also be difficult to sell commercial real estate in a real estate crisis.

This is why investors should have a good understanding of how commercial real estate investing works before diving in headfirst.

It is important to understand that the factors to consider when buying commercial real estate will be different than when considering buying a residential investment property.

If this is your first commercial real estate transaction, you don’t want to rush into a decision without doing your due diligence. Before you sign on the dotted line, there are some essentials you need to consider to end up with the right property for your purposes.

Below are the things an investor should consider before buying a commercial property.

1. Research commercial properties that match your investment goals

As with any asset, you must first think about what you want to get out of your commercial real estate investment. Taking a look at your lens would help you decide on a purchase.

For example, you might be looking to transform an outdated retail space or office. Or, if you’re thinking more about your long-term retirement plan, you might want to look for an investment opportunity that will provide you with steady income over the next five to ten years, such as a mall or strip mall. .

There are several types of commercial real estate options, and they come in different shapes and sizes. Some of them include:

  • Desks
  • Adjoining office space
  • Coworking offices
  • Industrial properties
  • Warehouse
  • Logistics building
  • Commercial spaces
  • Shopping mall sites
  • Big box retail

The type of property you consider will really depend on your individual goals. Be sure to talk to your real estate agent about your investment strategy so they can strategically narrow down your options.

2. Budget

Any investment business that needs money should have budget planning before it is executed. This is also true for a commercial real estate transaction.

It is essential for an investor to establish a budget allocation for the purchase price of the property, apart from other business-related costs. This will also help ease the process of choosing commercial property.

If you’re considering taking out a home loan, make sure you have a repayment strategy in place.

3. Strategic location

Location, location, location. You may think this mantra only applies to residential real estate, but that’s far from true. In fact, finding the right location may be more important for a commercial space.

Find a walkable, caring location that meets the needs of your future tenant. Research local market segments to see which ones have high revenue potential and high demand.

The most important factor generally tends to be the ease of access to that location for customers or prospective tenants’ clientele.

For example, if you are considering buying commercial space and your target tenants are small businesses or food service establishments, make sure that your property’s proximity has enough potential customers for your potential tenants.

But your search does not stop there. An investor must also consider the various variables that affect the location, impacting the level of property value either negatively or positively. Other factors to consider include:

  • Accessibility of the place
  • Suburb location
  • Population and zoning figures
  • Shops around the property
  • The level of competition
  • Distance from public transport systems (train station, trams, etc.)
  • Parking availability

Note that these factors will mainly depend on the type of commercial property and its respective needs. For example, if it is an industrial space, access to public transportation might not be your top priority.

It is also important to know the local council’s zoning laws and regulations and to understand the type of businesses permitted. You don’t want to make the purchase more difficult than it should be.

If the property you’re considering doesn’t meet the zoning requirements you’ll need for your purchase, you’ll end up going through more hoops than necessary after you acquire the property. If you are buying a historic home to use as an office building, make sure it is commercially zoned.

Also, be sure to check local government websites and determine any future developments and plans that may affect your commercial property.

4. The physical condition of the property

A commercial property in good physical condition tends to attract more potential tenants.

Before buying commercial real estate, check the condition of the property. If you are buying an existing property, it is also good to know what it was used for before your purchase. This will give you an idea of ​​how much wear and tear this property has had and what kind of repairs it might need in the future. It would also help in understanding the resale value or rent that could be earned in the future.

5.Limitations to modify

In some cases, there are laws and regulations that place restrictions on altering the exteriors or interiors of a property. It is important to learn the laws in detail and also be clear about your requirements. Remember that these restrictions will also apply to your potential tenant, so make sure you understand what restrictions need to be changed so that you or your property manager can provide appropriate advice.

6. Real estate litigation

Before buying a property, make sure it is free of any old or existing litigation. Common examples of commercial litigation include breach of contract, partner disputes, class action lawsuits, and shareholder issues. If such a dispute is found on the property, the buyer has the possibility to renegotiate or can also decide to immediately withdraw from the transaction.

seven. Check historical performance

When buying a commercial property, always research its historical performance, as well as that of other similar establishments, before buying there.

Be sure to check out the yield and capital growth performance of a particular type of property in the area you are considering investing in. Although past performance does not guarantee future results, having a history does provide some insight into the strengths and weaknesses of the asset.

This data will also help you understand current and future market trends, rental listings, tenant profiles and any other information that can help you develop your investment strategy.

8. Infrastructure projects

Each suburb or LGA has its own infrastructure that supports the growth of commercial properties. Government plans play a central role in determining how infrastructure will expand in a specific location.

Infrastructure, including roads, railways, airports, and hospitals, generally always has a positive effect on an area’s value. There is a plethora of online sources that offer information on future infrastructure projects that investors can take advantage of.

To get started, be sure to check out Smart Property Investment News section for the latest reports, information and news on the real estate market.

An area with a strong infrastructure plan can boost the demand for commercial property. For example, the establishment of a modern bypass would increase the need for a warehouse in the area. Indeed, most transport companies prefer to occupy these warehouses because of their access to affordable land and good roads.

9. Know your financing options

Financing a commercial property tends to be a more complex process than financing a residential investment.

This complex process makes it a tricky task to undertake and often leads investors to seek the help of a financial expert. The financial expert must ensure that the process is efficient to help the investor obtain the funds and on time.

Before applying for financial assistance, it is recommended to request a review of the credit file. After all, a bad credit report or a late payment can prevent a lender from giving you approval. Several factors will help a lender determine if a commercial real estate loan should be approved, including credit check, coverage ratio, down payment, and property appraisal.

10. Duration of the commercial lease

The length of the lease is important in determining the type of commercial property an investor will purchase. A good investor should ensure that the lease term is long enough to recoup the primary investment and generate the required profit.

It is always important to include a renewal option so that the tenant can secure the premises even when the rental agreement expires. Additionally, it is advisable to use an updated rental agreement to cover all local and national laws and regulations.

Things to consider when taking out a lease include:

  • Consumer price index, which affects the rental rate.
  • The lease term can be 10, 5 or 3 years with an option to renew.
  • Special council approvals, such as chemical treatment centers, medical facilities, and child care centers.
  • When tenants install partitions on the property.

When buying a commercial property, you should not rush, fearing to lose an excellent investment opportunity. A good investor will always take time and research thoroughly, taking into account the above factors to ensure that they will have profitable and long-lasting results.

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building manager

A property manager is a person or company engaged to manage the day-to-day operations, maintenance and administration of a residential, commercial or industrial property on behalf of its owners.

Real estate agent

A real estate agent is a licensed professional authorized to act as a representative of buyers or sellers in a real estate transaction.

10 things to consider before buying commercial property

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Last update: October 13, 2021

Posted: October 14, 2021