4 Questions to Ask Before Buying Commercial Real Estate

Commercial real estate is different from residential homebuying in many ways. Learn what you need to know before deciding to invest.

4 Questions to Ask Before Buying Commercial Real Estate Close
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4 Questions to Ask Before Buying Commercial Real Estate

Posted by Gary Ashton on Wednesday, April 24th, 2024 at 9:11am.

Things to Know Before Investing in Commercial Real EstateCommercial real estate investing can be a savvy and lucrative option with the potential to see better returns than stocks and bonds—but it also comes with significant risks. In the commercial real estate market, some research, knowledge, and expertise can be the difference between a money pit and a lucrative asset. To make the most of a commercial real estate investment, buyers should be aware of zoning laws and ideal locations for commercial real estate investment. It's also important to be well-versed in commercial real estate mortgage options and determine the seller's motivations.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.

What Is the Property Location Like?

Choosing the right location for commercial real estate investment can make or break the success of a venture. Is there a lot of street traffic? Can tenants make the money they need to succeed in this spot? Is there adequate parking?

Some businesses, such as business offices, dental practices, and law offices, do not rely heavily on foot traffic. Retail or restaurant spaces, by contrast, get a lot of their business from people who pass by and decide to check them out.

It's vital to pay attention to the current traffic at a given location, but determining what's expected in the future is just as important. This can be gleaned from things like development plans, roadways, public transportation, and more. Consider a spot on a major road. For buildings on major roads, try to determine whether the current traffic should be expected to continue; if there are plans to reroute surrounding roadways, organic traffic could plummet.

Finally, be sure to evaluate the availability of parking spaces and the ease of access to the property, as these factors can greatly influence the convenience for visitors and employees. By thoroughly examining these aspects, you can make an informed decision regarding the property's location and accessibility, setting the foundation for a successful commercial real estate investment.

What Is the Building's Zoning?

Before purchasing a building, look at what kinds of business the space is zoned for. Zoning dictates how land can be used and what type of structures can be built on it. Understanding zoning gives commercial investors the information they need to project what types of income they can expect.

Zoning regulations determine whether a building can be utilized for retail, residential, industrial, or mixed-use purposes. Some cities and neighborhoods have fairly lax zoning restrictions. Meanwhile, the Belle Meade community and the exclusive Brentwood area are likely to have significant roadblocks to rezoning. Investing in a property with the wrong zoning classification can lead to legal hurdles, restrictions on alterations or expansions, and even financial losses.

Conversely, acquiring a property with favorable zoning opens doors to a myriad of opportunities. Investors can capitalize on higher property values, increased demand, and greater flexibility in development plans. Moreover, savvy investors leverage zoning knowledge to navigate complex permitting processes and optimize their return on investment.

If a current tenant or owner has a zoning variance, investigate whether a new owner can be grandfathered in. Often, variances and special permissions are granted only to a current owner. Anyone who comes in the future may not be allowed to use variances the same way.

Why Is the Property for Sale?

When considering a commercial real estate investment, understanding the motive behind why a property is on the market is crucial. While superficial reasons like relocation or downsizing are common, delving deeper can reveal valuable insights that inform investment decisions.

A property might be for sale due to financial distress, operational challenges, or market shifts. Identifying these underlying issues allows investors to assess risk factors and negotiate from a position of knowledge. Additionally, uncovering the seller's motivations provides leverage in negotiations, potentially leading to more favorable terms.

Furthermore, knowing why a property is for sale helps investors gauge its long-term viability and potential for appreciation. Is it a strategic divestiture or a symptom of underlying problems? This understanding enables investors to craft tailored strategies, whether it involves repositioning, redevelopment, or asset stabilization.

There are significant differences between commercial and residential real estate, but the importance of sellers' intentions is ever-present in both. Discerning the rationale behind a property's sale empowers investors to make informed decisions, mitigate risks, and capitalize on opportunities in the dynamic commercial real estate market.

How Will the Deal Be Financed?

It's a good idea to have financing lined up before beginning the search for commercial property. Several types of loans and offers are available, each with pros and cons. A few standard finance deals:

  • Conventional Mortgages: These function pretty much the same way residential mortgages do.
  • Bridge Loans: These are short-term loans used while other financing, such as money from the sale of another asset, is lined up.
  • SBA Loans: The Small Business Administration (SBA) has several loans available for new businesses.
  • Hard Money Loans: These are loans that use the property itself as collateral. They are often easier to get because they do not rely on credit scores or history.

No matter which type of loan is chosen, the buyer typically has to offer up some earnest money to show their seriousness about the deal. The amount will vary but is often around 1% of the purchase price.

Other Questions to Ask When Buying Commercial Property

  • What is the location's potential for growth and development in the future?
  • What are the current and projected market conditions for the specific type of commercial property you are considering?
  • What is the overall demand for commercial real estate in the area?
  • What is the vacancy rate in the area, and how does it compare to the national average?
  • What is the property's condition and potential maintenance or renovation costs?
  • What is the property's potential rental income and return on investment (ROI)?
  • Have you thoroughly reviewed the lease agreements, including the terms, conditions, and potential risks?
  • What is the area's overall economic health and stability, including employment rates and local industries?
  • Have you conducted thorough due diligence, including inspections, appraisals, and market research?
  • What are the potential risks and challenges associated with the investment, and how can they be mitigated?
  • Have you consulted with legal, financial, and real estate professionals to ensure you understand the investment?
  • What is your long-term investment strategy and exit plan for the property?

Remember, investing in commercial real estate carries risks, and it is crucial to do thorough research and seek professional advice before making any investment decisions.

Get Ready to Make a Commercial Real Estate Investment

A commercial real estate investment is a huge responsibility. New commercial investors must know the intricacies of loans, leases, zoning, and other concerns. Take the time to consult experts, including commercial real estate lawyers, contractors, inspectors, and city zoning officials. By learning as much as possible in advance, prospective retail investors can choose the properties and agreements to bring the best return.

For informational purposes only. Always consult with a licensed real estate professional before proceeding with any real estate transaction.


Gary Ashton

The Ashton Real Estate Group of RE/MAX Advantage

The #1 RE/MAX team in the World!

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