Commercial Real Estate: The Buyers Market

Buying a real estate project is never easy. Although in the current market conditions, where prices are at a yearlong low, buyers are under the impression that they can get great value for money on their investments, there is always that possibility that you aren’t going to. So buyers must make calculated moves that will ensure that get the right kind of commercial property for the right kind of price.

Here are some tips on how to improve your commercial real estate buying strategy.

1) Get your finances in place:

This might seem as a fairly obvious suggestion but many buyers often ignore this rule and enter the market without thinking twice about their finances.

Some of the questions that you should be asking yourself before entering a real estate deal:

  • What is your estimated budget? This is the first question that you must ask. Without knowing your budget you will not know where to start looking or what type of establishment to look for.
  • How are you going to finance the deal? Is it going to be all cash or are you going to take out a mortgage? Do you have the sufficient funds for the down payment?
  • Have you set aside additional cash for associated expenses like repairs, modifications / redecorations, processing fees and commissions to your real estate agent? These must be sorted before start looking at properties.
  • Have you accounted for future expenses for maintenance and redevelopment work / expansion?

Most commercial real estate deals are financed with the help of mortgages and only a small percentage are all cash. So if you fall in the first category then it is important to get pre-approved for a mortgage. This will give you an estimate as to how much loan you are eligible for. Sure, there are hundreds of online calculators that tell you what you are eligible for. However, when it comes to real life situations, there can always be something that you didn’t factor in and your finances could go for a toss. This could result in your loan not getting approved or getting a much lesser amount than what you estimated or even getting loans at terms different from what you had preferred.

And in turn, this could lead to last minute shock and untimely panic and ultimately could cause the deal could collapse, as if you don’t have sufficient time left to finance the deal after you loan falls through, the seller may just move onto another buyer. To avoid such disappointments, it is highly recommended that a buyer gets pre-approved for a loan even before looking for a commercial property. This will help in estimating your buying power and at the same time offer you an edge during negotiations, as the seller is aware that you are approved and the deal can be closed once the negotiations comes to a conclusion.

2) Figure out your motive and strategy:

Unless you are a business owner yourself, you wouldn’t be looking to buy a commercial property to move in to. If you are a business owner and the property is for your own occupation then factors to look out for are if the property is in the right location for your business and are the finances right.

If in case, like most individual investors, you are looking to buy a commercial property to lease it out to a business or commercial establishment then a wide range of factors must be considered, such as:

  • What kind of businesses or commercial establishments are you looking to lease your property out to?
  • Do these businesses have the necessary space and amenities in your property?
  • Is your property zoned for the kind of business you want to lease out to?
  • Are there competitors around or a lack of market that would deter these businesses from setting shop in your property?

From the financial and investment perspective you must ask yourself the following questions:

  • What is the current market rent in the area?
  • Does the rental income meet your financial goals?
  • How long do you plan on holding onto the property?
  • What kind of appreciation are you looking to achieve in this timeframe? Is your goal achievable? Do past performances indicate that this is possible?
  • Will you be losing money if either one of these factors don’t go your way? Ideally, your cumulative rental incomes and appreciation value should outperform the mortgage payments, interest and property related expenses. If not you would not be making a profit, let alone breaking even.
  • Have you considered the opportunity cost? i.e. the potential money you could make by investing this money in a different instrument like say a bond or a stock. However, your motive to getting into real estate investment would most likely cover this point. Individual investors prefer getting into real estate, rather than equities or other financial markets mainly owing to the simplicity involved in the buying/selling and operation process.

3) Property Features:

Now that you have established your motive and finances, you can move onto what kind of property you would like to own. Commercial real estate projects can vary from space in a business park to an industrial building. So depending on the location of the property you can look for the right kinds of businesses to rent out to. For example, a property in a commercial complex location adjacent to a residential neighbourhood would be ideal for a grocery store or a hair salon or any other essential services. Similarly a property on a highway between residential and office places would be ideal for eateries.

However, property features also do matter. If you do decide to lease it out to a restaurant the property needs to have the necessary amenities and layout for it to be considered. So you may have to make modifications and changes to your commercial property if you aren’t flexible about the range of businesses that you would be leasing the property out to. You must also ensure if the property is in a proper commercial zone before leasing it out.

And in case you still have any concerns about buying real estate commercial properties then you must definitely reach out an established and experienced realtor who will not just navigate the murky waters of commercial real estate properties with you but also guide you towards the most optimum deal at the best price, which will definitely be suited for your buying instincts.

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