Tips for Buying Commercial Real Estate
Thinking of investing in a property? Experts suggest that investing money in a commercial property is much more beneficial than investing in a residential one. For the same, it is important to understand the difference between the both. The commercial property is used for business purpose whereas the residential one is for living.
It’s essential to decide on a few things before investing like, the kind of property you want to buy, the purpose of buying it, location of the property, your financial situation, what your risk tolerance is and whether you want to own it fully or in partnership? After deciding on the basics, there are a few things you should know for buying a commercial real estate:
Have a Deep Understanding of Commercial Real Estate
Becoming the owner of such a property is not an easy job. There are a lot of things which one should know prior to buying it. Firstly, commercial property is valued differently than the residential one. The income obtained from it is directly related to the square foot that is used. Secondly, there is more cash flow than from a residential property. Thirdly, leases for such properties are much longer than the other. Lastly, if you are planning to buy it, you would need to pay at least 30% cash for down payment.
Have a Plan of Action
Before buying a commercial property, it’s essential to set parameters like, how much cash you can pay, calculation of the mortgage amount that you would have to pay over the mortgage period, the income you expect from the property, know the competitors etc.
Recognize a Good Deal
It is important to be able to recognize a deal which is worth the investment by analyzing the risk, looking for damages in the property that may need repairs. Moreover, the deals you can’t walk away from are the best ones.
Be aware of the Keywords
There a few terms which familiarize you with the metrics of commercial property. The first being NOI (Net Operating Income). It is calculated by subtracting the operating expenses from the gross operating income of the first year. The second one is cap rate. Capitalization of these properties is used to calculate the value of income producing properties. Another important term is cash on cash.
Look for Motivated Sellers
Real estate is driven by customers and nothing happens till you get the best deal. It can only be obtained from a motivated seller, who, for any reason, is pressed to sell his property below the market price.
A smart way of evaluating a property is by studying its neighborhood and talking to the owners.
Buying a commercial real estate is a long process. It can be made slightly easier by building a rapport and good relationship with the property owners so that they can comfortably talk to you about various deals. The key to get the best deal is to do a proper research and then closing the deal with a clear communication level with the seller.