Investing in commercial real estate is much different than investing in residential properties.
Familiarity with the residential real estate investment process doesn’t necessarily translate to the commercial market, so you’ll need to understand the differences before taking the plunge.
It’s All About the Numbers
Commercial real estate investing is strictly a financial decision. Buying a commercial property means doing your due diligence on many topics, such as: the financial terms of sale, the current state of the local real estate market, the area’s demographics, the history of the property, potential property improvements needed, zoning and researching the historical use of the property. Depending on the type of property and it’s intended use, you’ll have others as well.
Unlike buying a home, this isn’t an emotional decision. This is about making money. So it comes down to running the numbers and making well researched financial projections about cash flow, vacancy rates, property appreciation, debt service, etc.
A good commercial Realtor© can guide you through the process and also help you to understand commercial real estate financial analysis.
You’ll need to be familiar with all sorts of targeted financial calculations, including free cash flow, ROI (return on investment), CAP Rate, basis, break-even and debt ratios.
Working with a Commercial Real Estate Broker
The best approach is to find an experienced commercial realtor who can do the leg work for you and provide comps and specs on a range of properties so you can better understand the market. Unlike in residential real estate where the broker’s fee is usually paid by the Seller, commercial realtors earn their fees in a variety of ways.
There is no rule of thumb as to whether the property owner or the buyer will pay the fee. And some brokers now work on a consulting type basis as well. This is definitely a negotiated fee structure, so discuss the broker’s terms early in the process to understand what your outlay will be and to be clear on what services you will receive. And also make sure you know on what your legal commitment is around working solely through that broker, being able to work with other brokers or being able to find properties on your own.
Commercial Real Estate Financing
You need to get your ducks in a row: once you stick your toe into the commercial market, you should take the necessary steps to find a suitable lender. That means organizing your documentation and talking to the lender about the property you are considering. The better your documentation of the financial viability of the project, the more likely you will be to find financing and get favorable terms.
Your commercial Realtor© should be able to give you some referrals to lenders that are suitable for the type of property you are investing in. That’s usually a good place to start and definitely talk to a few different lenders to get a sense of the options available.