Buying commercial real estate can be a lucrative investment, but it requires careful consideration and a strategic approach. Whether you are an experienced real estate investor or a first-time buyer, understanding the intricacies of purchasing commercial properties is crucial to making informed decisions and maximizing returns. In this overview, our brokers will explore the essential steps and considerations involved in buying commercial real estate.

What is Commercial Real Estate?

Commercial real estate refers to properties that are used for business purposes, such as office buildings, retail spaces, industrial facilities, land, and multifamily apartment buildings. Pickett Sprouse Commercial Real Estate broker Mark O'Neal, CCIM explains that the goal of commercial real estate investing is "to get a return on your investment and to create equity." Broker Emilee Collins, CCIM adds that you can either use the property for your business or "derive an income from it by leasing it to other tenants."

Primary Ways to Buy Commercial Real Estate

There are several primary ways that you can buy commercial properties. Emilee offers a look at what those are.

  1. You can purchase commercial real estate on a small scale, like land or a building, with your own capital or through financing. This method involves using your personal savings or finances to buy a commercial property outright, or you can obtain a loan from a lender. By purchasing land or a building in this way, you become the sole owner and have complete control over the property.
  2. You can combine your capital with other investors to be able to purchase larger projects like multifamily projects. By pooling resources with other commercial real estate investors through real estate crowdfunding, you can increase your purchasing power and access larger commercial real estate deals.
  3. You can invest in a Real Estate Investment Trust (REIT) that has been established by a company that owns or finances income-producing types of real estate in all different property sectors. Investing in REITs allows you to buy shares of commercial real estate properties without having to directly own or manage them.

Process for Buying Commercial Real Estate

The process of buying commercial real estate includes at least 8 essential steps. From defining your objectives to closing the deal and managing the properties, these steps will help take you from potential investor to property owner.

Determine your investment goals and budget

Before diving into purchasing commercial real estate, the first step you should take is to define your investment goals and establish a realistic budget. Consider the following factors:

  • Investment strategy: Determine whether you are seeking long-term appreciation, immediate cash flow, or a combination of both. This will help define your risk tolerance. Emilee advises that "like anything you would invest in, you need to know how much you have available to invest in commercial real estate and how much you’re willing to risk in case it loses value and you need to liquidate during a low valued point." While the S&P 500 Index shows that the average annual return on investment for commercial real estate is 9.5%, Mark says that it's important to look at your return on investment coming from a positive cash flow and appreciation realized upon sale.
  • Financial capacity: Developing a budget will help you determine your overall investment strategy. Mark notes, “A good budget with cash flow projections will help level the cash flow needs and ease the worries that the property and the market spring on you."

Assemble your team of trusted professionals

Navigating the complexities of commercial real estate transactions often requires the expertise of various professionals. Both Mark and Emilee recommend that you consider assembling a team that may include:

  • Real estate broker: A commercial real estate agent can help you identify suitable properties and negotiate deals. Emilee says, "Even before you are considering purchasing property, it’s helpful to have a commercial real estate advisor help you define your goals and understand the market and the asset class you wish to invest in."
  • Accountant: An accountant can provide valuable insights into the tax implications, tax advantages, and financial aspects of your investment.
  • Real estate attorney: A legal professional can review contracts, conduct due diligence, and ensure that the transaction complies with all legal requirements.
  • Surveyor: Surveyors identify and mark boundaries and help to understand the size of buildings that can be placed on the land.
  • Land planner: Land planners can provide valuable information about any potential zoning restrictions; Planners research and gather data from a large variety of sources, recognize various environmental and regulatory constraints, and formulate and analyze various site design scenarios as part of helping clients make informed decisions regarding land development.
  • Engineers: These professionals bring technical expertise and a critical eye to the assessment of the property, looking for potential issues with the building's structure, mechanical systems, and overall condition. Their evaluation can help you make informed decisions about the property and negotiate the best deal possible. Additionally, they can provide valuable input on any necessary repairs or upgrades that may be needed, helping you avoid unexpected expenses down the line.
  • Environmental engineering consultants: They assess and identify environmental issues and advise on mitigation.

Research potential properties and locations

When evaluating potential commercial properties, it's essential to consider the following:

  • Location: Assess the property's proximity to amenities, transportation hubs, and target demographics. Emilee suggests, "Properties that have strategic locations to critical modes of transportation or are near hubs of population should be considered." Mark adds that you also want a property that is close to you and is easy for you to keep an eye on. He says, “Inspect what you expect.” In other words, for smaller investors, you want to be able to frequently drive by and check on the property.
  • Physical Condition: Conduct a thorough inspection to identify any maintenance or structural issues. You'll want to consider factors such as the age of the building, the condition of the roof and HVAC systems, and any recent updates or renovations that may be needed. As we mentioned previously, hiring a professional inspector or engineer to thoroughly examine the property for any structural issues, code violations, or maintenance issues that could affect its value or potential income is strongly advised.
  • Market Trends: Research the local real estate market to understand demand, rental rates, and property appreciation potential. According to Emilee, "If a property is undervalued due to a market downturn or a distress situation, it can make an ideal investment."
  • Property types that align with your knowledge and experience: Mark recommends investing in property types that build on your knowledge and experience. "You may have grown up on a farm, have an uncle that you helped in his business, or worked in retail or an office. Invest in those types of properties because you will already be familiar with what to expect from it."

Make an offer on the property

When submitting an offer on a property, it's important to be prepared with financing options and be willing to negotiate terms such as price, closing date, and contingencies. Once an offer is submitted, the seller may accept, reject, or counter the offer. You'll want to be prepared for any outcome and be willing to negotiate further if necessary. Ultimately, the goal is to reach an agreement that is favorable to both parties and ensures a successful transaction.

Obtain financing

If you can't pay cash for the property, you'll have to obtain financing in order to purchase it. There are several common ways to do that.

  • Traditional commercial mortgages
  • Friends and family
  • Small Business Administration (SBA) loans
  • Owner or seller financing

Due diligence and property inspection

Before finalizing a commercial real estate transaction, thorough due diligence and property inspection are imperative. This involves:

  • Title Search: Verify the property's ownership history and any existing liens or encumbrances. Emilee advises, "A real estate attorney or title company should conduct a title search to confirm ownership, liens, and what a title policy would include for coverage should there be issues in the future."
  • Physical Inspection: Engage professionals to inspect the property's condition, including its structural integrity, mechanical systems, and environmental compliance. It's also important to obtain information on how the property had been previously used so that any environmental hazards are uncovered. According to Emilee, "Being able to examine a property thoroughly allows an investor to anticipate what expenses can be expected in years to come. Expenses will reduce the return on investment and should be considered carefully."

Close the deal

Just like buying residential properties or a single-family home, closing the deal when buying commercial real estate can be overwhelming. It involves finalizing the terms and conditions of the purchase and sale agreement and your careful review of all closing documents. Be sure and ask questions about anything you don't understand before signing. The final step is arranging for the transfer of funds to the property seller and completing the necessary paperwork to officially transfer ownership of the property.

Managing the property

After acquiring a commercial property, effective management is essential to maximize its potential. Mark says the question to consider when deciding whether to hire a property management company or to manage it yourself is "How involved do you want to be in the day-to-day management? The investment return if you hire a management company may be lower because you are buying convenience and its expertise, but at the same time, the hassle should be a lot less than if you're managing the property yourself."

If you do manage the property yourself, Mark notes that you’ll need service companies such as plumbers, HVAC technicians, and roofers as reliable partners. Identifying these professionals early on in your ownership, before you encounter any issues, will certainly be in your best interest.

In addition, Emilee offers this advice. "Whether you hire a property manager or manage the property yourself, a comprehensive plan with all parties is important. Expectations should be ironed out for roles and responsibilities from the contractors you hire to maintain your property. A property management company can be a great resource to manage all aspects of billing, maintenance requests, contractor scheduling, etc. In addition, scheduling maintenance and property walkthroughs regularly is important so that you can take a proactive approach to repairs and forecast expenses in advance."

The Bottom Line on Buying Commercial Real Estate

Buying commercial real estate is a multifaceted process that requires diligence, expertise, and a strategic approach. By following these steps, you can navigate the complexities of getting into commercial real estate transactions and achieving your investment objectives. Whether you're new to commercial property investing or you're expanding your portfolio, the steps outlined in this guide provide a solid foundation for making informed decisions and capitalizing on the opportunities that owning commercial real estate offers.