Commercial real estate according to Wikipedia refers to buildings or land intended to generate a profit, either from capital gain or rental income. Commercial real estate includes office buildings, strip malls, restaurants and any other real estate in which people conduct business. Investing in commercial real estate just like any other business decision, has its risks and benefits. There is the need for expertise and careful strategizing before a well informed decision can be reached on whether or not to purchase or lease a commercial real estate.
There are some basic steps to take before you purchase a commercial real estate and they are outlined below;
1. Analyze the risk and benefits of purchasing commercial real estate:
When making the decision to purchase a commercial property, it is important to take into consideration the potential risk and benefits that a purchase may hold for your business.
Some of the risks/benefits involved in investing in commercial real estate are as follows;
• Buying in to commercial real estate may be more beneficial than leasing if you are buying to maximize return on investment.
• Owning your commercial property adds to your asset appreciation over time, which means that your company’s equity grows.
• It is critical to buy commercial properties in the right location. The right location ensures that your business is at the heart of select target audience and is easily accessible by your clients, key suppliers, and associated businesses. The right location also conveys a certain kind of impression to your target audience which in turn benefits your business. It is also important to note that the locations that are “hot” today might not be so tomorrow and vice versa.
• Buying of commercial real estate when the finances to do so is not readily available can lead to loss of liquidity.
• If you intend to put up your commercial real estate for lease, it is important to understand that leasing is not always the best option for cash flow. Tenants can default with their payment date, or even out rightly decide not pay at all, and if you are depending on the income it can turn out to be very disappointing.
• The income that a piece of commercial real estate produces is directly related to its usable square footage which leads to higher yields.
2. Seek advice from a team of experts:
When considering the option of buying a commercial real estate you need knowledge and experienced advice before you go ahead with the purchase to enable you make the right decisions. Your team should be properly selected based on their track records and working styles. The team should consist of a Real Estate Professional who specializes in commercial real estate to help select suitable properties in preferred location within the budget and also facilitate negotiations between buyers and sellers; an Attorney to conduct due diligence on the property, prepare formal offers, reviewing all documents, and ensure contracts are sufficiently detailed, and structured to your maximum advantage; an Accountant to help figure out what your business can afford and analyze the tax and operating budget benefits; an Insurance Agent to insure your assets; a Business Advisor to provide solid perspective and advice in the financial process; and/or a Mortgage Broker/Lender to provide finance if required.
3. Choose the property wisely:
Some of the things to take into consideration when choosing the right commercial property for your business include location, accessibility, sale/lease price, size and layout of space, type of building, construction, available facilities including administrative support and meeting areas, car parking, security, opportunities for expansion, and lots more. Once you have shortlisted the commercial property that best suits your requirements, work with the owner on the right price.
4. Get financing for the purchase of the property:
Make sure before you apply for any mortgage (if needed) you already have the down payment covered, as well as proof of income to cover the monthly payments. Commercial properties generally attract a higher down payment than residential properties.
At this point, you need to have your lawyer explain every detail of the sales/purchase agreement (SPA) so that you know exactly what your rights and obligations are.
Commercial real estate like residential properties is also affected by the law of demand and supply. There is no one-size-fits-all strategy for purchasing commercial real estate. That decision must be weighed by individual businesses and their specific requirements and goals. Investing in commercial real estate is a long-term affair and it is important you get it right from the start.