Real estate investors have two arenas to grow their money: residential and commercial. Purchasing commercial real estate is a complex process. When compared to residential purchases, there is much more to consider, however, the reward may be exponential. It’s an exciting market to invest in and if you’re curious about purchasing commercial real estate, consider these factors first.
Review These Key Factors For Purchasing Commercial Real Estate
Location
You know what they say: “location, location, location.” The property’s location has a lot to do with the general price tag, but also with its potential. Your return on investment is greatly impacted by the location of the property in terms of the amount of traffic as well as how it is zoned. Be aware of the zoning ordinance and the types of businesses that can exist there. The local community has established the zones in the best interest of the community, and understanding them will set you up for success.
Type of Property
A shopping center is vastly different from an industrial site. There are profits to be made in any segment and considering the type of property will be one of your first areas of research. Retail properties like shopping centers, strip malls, and restaurants have many variables and possibilities, raw land has even more. Residential establishments and office buildings may already have a steady stream of revenue although the maintenance costs can be just as steady. With so much to consider regarding the type of property, you may want to stick to a particular niche where you personally have experience and a genuine interest.
Condition
You will tour the site and make your own visual inspection but you will want to hire a professional inspector to review the property. Also, ask the current owners’ agent for reasons why they are selling. Try to gather as much information early in the process, but the current owner must provide a disclosure should you go into a contract. Knowing the condition will be important as you plan the site’s future uses.
If you are serious about a specific property, you may even want to have an environmental study completed. This will reveal existing or potential liabilities and can prevent expensive surprises from occurring after you’ve made the purchase. It’s your due diligence to ensure your property is environmentally safe.
Valuations
Determining the value of commercial real estate is difficult. Sellers and buyers rarely agree on the price because much of it centers around opinions of the property’s potential. Raw land, for example, could be used for many purposes. With existing commercial structures, calculating the value takes into account current leases, income, costs, and the property’s revenue. The value can be based around the current income as well as the potential income. Even with hard figures, agreeing on an evaluation isn’t always easy.
Commercial real estate appraisals can get expensive, costing thousands compared to that of a residential appraisal, but they can help both parties get closer on the purchase price.
Existing Leases
Are there any existing leases on the property? Depending on the type of property, there may already be existing businesses on the site. Understand the current leases before purchasing the property. Familiarize yourself with the contracts so that you’re prepared for taking ownership. Be aware of what you legally can and cannot do with your property.
Can you afford the property after you purchase it?
Buying the property is one thing; maintaining it is another. Property taxes and insurance are essential, as well as interest if you’ve financed the cost. Calculate these costs before the purchase. Ask the current owner about their maintenance costs, but also research them for yourself.
After the transaction, there are many factors that will impact your investment. Landscaping is a major expense; obtain estimates before committing to the purchase. Maintaining the parking lot and existing structures can get expensive. Depending on the type of property you purchase, you may need to be prepared for the costs of plumbing, HVAC, and roofing. A thorough inspection can give you a glance into what future costs may be.
Regardless of the type of property, it will need to be maintained. This takes time and money. Some investors will manage this themselves although some will hire property managers. That is another expense.
Financing
Purchasing commercial real estate takes a considerable amount of capital. Cash transactions are easiest but not feasible for some investors. Consider how you will obtain necessary capital. Commercial loans are more complicated than residential loans and you’ll have to factor in the interest costs.
You can also partner with other investors to spread the costs and risks, which also means sharing the return.
Investment Goals
What rate of return are you hoping for, and what time frame are you aiming for? Flipping a residential property for profit can be accomplished in a short amount of time. That’s not usually true in commercial real estate. It can take years, or decades, to realize a profit from commercial real estate.
How To Purchase Commercial Real Estate
You’ve decided to invest in commercial real estate. Now what?
Your first step is to hire an experienced real estate broker. Ask other local commercial real estate owners for recommendations and interview multiple agents before selecting one. The right broker can help you select a property, understand each step, analyze the investment, and can even help find future tenants. Choosing a local broker is best. Your broker will be nearby for property showings and can give advice on your specific market.
If you don’t already have one, you’ll also want to select a Certified Public Accountant. Your CPA will help evaluate the financials of a property, and they can review and prepare financial statements. They can also be another set of eyes on your contracts. Like your real estate broker, work with someone local who understands your market.
Consider retaining a commercial real estate attorney. Select a local attorney who specializes in commercial real estate. You’ll want their expertise on transaction law, and they can review contracts during the buying process. After the fact, your attorney will be an asset regarding property law.
The key to purchasing commercial real estate is hiring the right professionals.
Having the right professionals on your side is the key to successful commercial real estate investing. Once you’ve secured your team, you’ll also want to hire a commercial real estate inspector to inspect any properties you are interested in. In addition, contact your insurance agent to determine what types of coverage you will need, and the costs as well.
Surrounding yourself with the right team is essential.
Purchasing Commercial Real Estate in the Smoky Mountain Area
Understanding the various aspects of commercial real estate and your specific market are required for a successful investment. Consider these tips, hire your team of professionals, and then seek the right property. Investing in commercial real estate can be risky, but the reward can be great.
For information specific to the Smoky Mountain area, reach out to us and let’s get started. The Sevier County Economic Development Council is a great resource for data. Plus, view our current commercial real estate listings here.
Have fun searching for the right property! If you’re searching for commercial real estate in East Tennessee, we have the right professionals to help.
Authored in Appalachia || Amy Morton
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