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 RE/MAX on Thursday, October 14th, 2021 at 9:11am.

Things to Know Before Investing in Commercial Real EstateInvestors who want to get a better return than stocks and bonds can offer should start looking at commercial real estate. 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 in-the-know on commercial real estate locations, aware of zoning laws, proficient in tenant relations, and well-versed in commercial real estate mortgage options. Keep reading to become an expert on the four questions investors should know the answers to before buying commercial real estate.

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

What Is the Location Like?

Choosing the location of commercial real estate can make or break the success of a venture. Is there a lot of street traffic? Will tenants be able to 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.

Pay attention not just to the current traffic, but what is expected in the future. Consider a spot on a major road. Is this going to continue to have a lot of passing traffic, or are there plans to reroute soon? The loss of passing traffic can dramatically affect the attraction of the property for tenants.

What Is the Building's Zoning?

Before purchasing a building, look at what kinds of business the space is zoned for. This gives commercial landlords the information that they need to project what kinds of income they can expect.

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 get the same sorts of use.

What Sorts of Tenants Will There Be?

Understanding the types of commercial real estate leases available also helps owners determine what their potential tenants will expect.

Some tenants will want customization to the space before they rent. In many cases, the tenant is responsible for any changes or maintenance. However, some landlords offer upgrades to attract desirable commercial tenants.

It is also vital to understand the terms of the lease. Certain tenants, for instance, will want exclusivity in your area. So, a restaurant offering breakfast may request that no competitors be allowed during their hours of operation as part of their lease.

How Will the Deal Be Financed?

It's a good idea to have financing lined up before beginning the search for commercial property. There are several types of loans and offers available, each with its 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 will typically have 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.

Ready to Invest in Commercial Real Estate?

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 Real Estate Team in Tennessee and #2 RE/MAX team in the World!

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