How To Buy Commercial Real Estate 101
We at Pillar Real Estate Advisors are often asked this very general question. The reality is that the answer is a product of many factors specific to the Buyer. For many, commercial real estate is a topic of uncertainty, but equally one of great interest by virtue of its potential upside.
Commercial real estate is any property utilized for business purposes. For example, property rented to various businesses like malls, office space property, industrial property, land proposed for commercial use, warehouses, hotels, and others.
Why Invest in Commercial Real Estate
Investing in commercial real estate is a complex undertaking and the best and wise investment you can make. The earning potential through passive income, consistent returns, and growth potential make buying commercial real estate more profitable than purchasing a residential property. The annual earning potential on commercial real estate investment is between 5% to 10% depending on its location, current economy, and other external factors.
However, not all commercial real estate investments yield the same earning potential. Therefore, taking careful consideration on what, when, and the location is key to the success or failure of your commercial real estate investment. So, how can you successfully buy commercial real estate?
We’ve identified five important areas to consider before making your purchase:
● Securing financing
● Considering your investment goals
● Conducting market research and analysis
● Performing your due diligence before investing
● Making an offer
Secure Good Financing
Have you secured funds through savings, loans, or investors? Available funds enable you to identify the right commercial real estate that is within your means.
Consider your Goals for Investing in Commerical Real Estate
Conduct Market Research and Analysis
Perform your Due Diligence before Investing
Make an Offer
Make an offer with an inspection contingency clause that protects you if the commercial property does not pass inspection. Avoid signing purchase contracts before your financing institution has reviewed the purchase contract and agreed to provide financing.
We recommend structuring most initial offers to purchase commercial real estate as a non-binding term sheet or Letter of intent LOI. This allows the basic business terms of a deal structure to be negotiated ahead of the formal contract stage. Many terms such as price, deposit schedule, inspection timelines, etc.. can be vetted out in advance. By structuring a formal contract using the agreed-to points of a non-binding term sheet, review and negotiation times involving attorneys can be reduced.