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What to Consider Before Buying Your First Commercial Property

Posted by admin on September 14, 2020
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commercial-buying-guide

The factors that matter most to you when buying commercial property are going to be different than those for another buyer. Especially if this is your first commercial real estate transaction, you don’t want to rush into a decision based on something someone else has done. While in the consideration phase of buying real estate, there are some essential things you’ll need to ask yourself, so you end up with the right property for your intended purposes.

What Type of Property Are You Looking For?

When you think of a commercial property, an office building might come to mind, but there are a lot of other types in and around Denver, CO, that are considered commercial, such as:

  • Hospitality – These are motels, hotels, and even short-term rentals.
  • Industrial – This includes storage facilities, distribution centers, warehouses, and other similar factory-style properties.
  • Multifamily – These would be your smallest duplexes and your largest apartment complexes, including properties containing multiple large complexes.
  • Office – This includes one single office on the corner of a street, as well as skyscrapers.
  • Retail – This would include restaurants, shopping malls, copy shops, and grocery stores.

Perhaps you’re unsure right now what type of property you want to invest in. That’s OK! Perhaps taking a look at your purpose would help you decide on a purchase. For example, are you hoping to fix up the property and flip it? If so, a small motel might be a great option. Do you plan to run your business from the property you purchase? A skyscraper might be your number one choice. Some other investment options include:

  • Development – Turning raw land into a functioning commercial building.
  • Land Banking – Purchasing a large portion of land in hopes developers will come along after it has appreciated in value.
  • Passive Investing – A buying-and-holding strategy for long-term situations.
  • Value-Add – Buying, rehabilitating, renting, and refinancing a property, then repeating the process.
  • Wholesaling – Putting a property under contract, then selling the contract to another investor.

Is the Zoning Correct for Your Purposes?

You don’t want to make the purchase harder than it needs to be. If the property you’re looking at doesn’t meet the zoning requirements you’ll need for your purchase, you’ll end up jumping through more hoops than necessary after acquiring the property. If you’re purchasing a historic home to use as an office building, make sure it’s actually zoned commercial.

There are also specific zoning requirements for specific types of commercial properties. For example, if you’re turning the property you purchase into a restaurant, check to ensure the property is aligned with the specific zoning requirements for restaurants. Start with city zoning requirements and work your way up through higher government levels until you’ve satisfied them all.

Do You Know How to Underwrite an Investment?

You don’t ever want to just take someone else’s word that a property is going to make you money. Underwriting commercial real estate is a great skill to have. You could take a Certified Commercial Investment Member course to get started. In the class, you’ll learn how to analyze financials, determine user criteria, research markets, and make smart decisions. After a CCIM course, you should be able to quickly and easily calculate an expected return on any commercial real estate purchase.

Once you’ve got those underwriting basics, you’ll want to practice them often. Underwriters charge thousands of dollars for one real estate deal, which is going to quickly drain you of any down payment you’ve saved up. If you can do it yourself, you’ll save a lot of money. Underwrite one deal each day in Denver or the surrounding areas. This gives you an opportunity to fine-tune your skill, but it’ll also give you some ideas on why you would or wouldn’t pursue certain properties.

Are You a One-Man Team?

As a one-man team, you’re not going to have the expertise required to make the best decision when buying commercial real estate. There are five professionals you should add to your investment team.

  1. Attorney – A commercial real estate attorney is going to become your best friend when it comes to understanding zoning restrictions, issues regarding the environment and land-use, or negotiations. He or she can also review the sale to ensure it’s fair.
  2. Broker – Your broker will find the deals that fit within your specific purchasing criteria, though you should still underwrite every option.
  3. Contractor – A contractor who specializes in commercial properties will be able to spot all the maintenance and repair items that will be needed, and give you an accurate idea of the expenses.
  4. Lender – You may want to have a relationship with multiple lenders because they all have different criteria when it comes to buying commercial property.
  5. Manager – Even if you don’t end up using a property management company after your purchase, a commercial management company can assist you in determining the pros and cons of the property.

 

Have You Looked at Multiple Properties?

In most cases, the first property you look at isn’t going to be the best option. As you look around, underwrite some of your options and discuss each scenario with your team of professionals, you may begin to find issues that are important to you but that you hadn’t considered previously. There’s always a chance you’ll go back to that first property, so you don’t need to completely wipe it off the list, but you should always take a second and third look at any property you get serious about.

Does the Property Come With Current Tenants?

Maybe an empty building is part of your criteria for purchasing real estate, but have you considered what you’d do if you purchased a property with current tenants? Some of those tenants might be in contracts and should be allowed to stay on the property until the contract is up, though it does depend on the terms of the contract. Read through any contracts for current tenants. Is their agreement void upon the owner selling the property? Do you have to uphold the contract? Can you give the tenants a 30-day notice?

Perhaps you want the tenants to stay. There are some things you should consider to ensure they do. Could you afford to lower the rent? Is there a discount for tenants who have been there ten years or more? Are there maintenance fees you could wipe out? Anything you do that saves the tenants money or improves the situation they were in with the previous owners could play in your favor.

Getting a Jumpstart On Your First Commercial Purchase

As you can see, there are a lot of factors to consider when buying commercial real estate for the first time. The good news is once you get a handle on what you’re doing, you can streamline the process to become a stronger and smarter investor. For assistance in getting a jump start on the purchase of your first commercial property in Denver, CO, contact Unique Properties, Inc. at 303-321-5888.

Image credit: Indypendenz/Shuttershock

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