Wondering how to buy commercial real estate but don’t know where to start? Discover all the tips for buying commercial property you need to know in our guide.

The real estate market landscape is in a constant flux, and while most people are vaguely aware of residential real estate, commercial real estate and purchasing commercial property can be a bit of a mystery. Everyone needs a place to live, sleep, and raise a family. Not as many people own a business, and even those that do own their own business don’t necessarily need to buy up commercial real estate as a business owner. Many companies are happy to rent office space for their needs.

The process of buying commercial real estate can seem confusing and intimidating — maybe more so than purchasing a home. While there are things you should absolutely keep an eye out for, commercial real estate can be much easier to navigate when you are partnered with the right Commercial Specialist. Learn more about how to buy commercial real estate below.

Commercial vs. residential real estate

Residential real estate describes any property designed specifically for housing people. This residential property includes single-family homes, condos, apartments, and vacation homes—all of which provide the opportunity to enjoy the benefits of owning a home. Commercial real estate refers to any commercial real estate property that is designed for conducting business, including office buildings, warehouses, restaurants, and strip malls.

The one sticking point is multifamily units. Multifamily properties with five or more units are considered commercial real estate despite the fact that they are designed for residents. Hotels and motels are also considered commercial real estate.

Why buy commercial real estate?

For a real estate investor, purchasing commercial real estate can be lucrative. With a commercial real estate investment, you collect rental income from businesses that use the space and, when the property gains value, you can make profit from a sale. Most businesses are fine with leasing commercial space for their specific needs, but buying real estate for your business actually comes with a ton of benefits.

• Control over the space – If you have ever rented an apartment, you know the lack of control that can come with that. Even small things like hanging pictures on the wall can make you hesitate and recheck your lease terms. The same idea applies to commercial space. When you own the space, you have complete control over every aspect of it, whether that’s making general renovations or building out expansions as your business grows. You can customize the space to your exact needs and you set your own terms for usage, which extends to other tenants in the building.
• Fixed rates – By owning the space, you know exactly how much you are spending on the mortgage every single month. You don’t have to worry about unexpected rent increases, fees, or security deposits.
• Tax breaks – Owning and running your own business space can potentially lead to some tax breaks. You can get an advantage in capital gains taxes and expense mortgage interest, property taxes, and other costs.

You should consult with your accountant before you make a purchase, but it’s worth asking yourself why you want to buy or invest in commercial spaces in the first place.

Consider your financing options

Even before you check the classifieds or dip into the existing market offerings, it’s a good idea to look into your financing options. You might not qualify for certain types of financing or run into other hurdles later on, but our Commercial Partners are here to help you with your specific needs.

The main thing to look at when considering financing is your own credit. Depending on the type of loan you apply for and the lender, your business credit score and credit reports may come into consideration. Some lenders even check your personal credit. Of course, you still have financing options if you have bad credit, but you might have to contend with higher interest rates or down payments.

Once you have a good idea of your credit score and general credit information, you can begin to look at how to get a loan for commercial property or other financing options available. The type of loan that you ultimately settle with will depend on a variety of factors, including the type of property, your credit, and your business history. These include:

• General commercial real estate loans
• Business loans
• Hard-money loans
• Seller financing

If you are already an established, profitable business, your best option is a Small Business Administration loan. The SBA offers the lowest borrowing costs, allowing you to borrow up to $5 million to buy real estate or refinance existing loans on real estate. The APR on these loans is low and comes with a 25-year repayment plan, which all ultimately results in lower monthly payments than typical business loans. Qualifications for an SBA loan include:

• A good personal credit score
• At least two years of business history
• Strong annual revenue
• At least 51 percent of the property must be occupied and used by your business

You can also find loans geared specifically toward renovation costs. Funding Circle offers loans of up to $500,000 with five-year repayment terms.

Build a team

As you get your finances in order, start building a team of experts to help you on your journey. Finding commercial real estate can be extremely complicated on your own because it involves specialized knowledge that you probably don’t have. Some people to include in your team:

• Accountant
• Commercial REALTOR®
• Tax attorney
• Commercial real estate attorney
• Commercial lender or mortgage broker

If you’re not sure where to start, any Commercial Associate at Berkshire Hathaway HomeServices California Properties can set you on the right path. Our Commercial Division consists of a highly experienced team of agents with the experience, training, and expertise to guide you through every step of the process. We can provide you with the tools and knowledge necessary to navigate the market and find the perfect investment for your business.

Finding your team before you start looking for a property ensures that you have all right help up front. You don’t want to find a promising piece of property and then fumble to find a trusted, knowledgeable person to answer your questions (and likely miss out on the property in the process). Assembling the right team allows you to hit the ground running as soon as you find the property of your business dreams.

Find the right property

You have identified your financing options and found the right team to back you up. Now it’s time to look at what the market has to offer. Having a real estate expert, like those in the Berkshire Hathaway HomeServices California Properties Commercial Division, already gives you a leg up. Real estate experts have knowledge of the local area and neighborhoods, and can give you insider information on specific markets. Commercial real estate experts can be even more important, as they have a lot of information about the market that is not readily available online.

Pay attention to location and square footage, and make sure the space can fulfill your specific use needs. Don’t be afraid to lean on a professional for some extra guidance, as there are myriad benefits to working with a real estate agent. Try not to worry too much about property value. With residential real estate, property values are based on the comparable properties in the area, as well as proximity to schools, sites, and other amenities. This makes residential properties more volatile to market trends. By comparison, commercial real estate value is largely dependent on the amount of revenue that it generates. The higher the cash flow for a commercial property, the higher its property value.

Once you do find a promising property, do your due diligence. Research the property’s history and what it was used for before. Research the property taxes and what the property is zoned for. You want to know this property inside and out. While commercial real estate can be lucrative, a bad commercial investment can be much more costly.

Make an offer

Once you have found the property of your dreams and done all the necessary research, you can make an offer. Your real estate agent can help you write up your offer. Depending on the real estate market, you might have to contend with offers from other buyers and deal with negotiations. If you want to give yourself an advantage, submit pre-qualification papers and provide proof that you don’t have contingency on your finances. Once you come to an agreement, be prepared to pay earnest money, which can be up to 1 percent of the purchase price.

Once your offer has been accepted, you enter contingency escrow. This is essentially a period where you can back out of the deal if things go awry. For example, the property may fail an inspection or have zoning issues. During this time, your lender might ask for an ALTA, or an American Land Title Association survey. This survey can provide information about the property, including boundary lines, utility lines, and locations of improvements.

If you choose to waive contingency escrow, you will enter perfected escrow. You can still back out of the sale, but you will lose the money you put down as a deposit.

Closing

If everything checks out with the ALTA and the contingency period, you can proceed to closing. Closing begins the process of signing papers and transferring money from buyer to seller. As soon as you have the grant deed in your hands, you’ve officially become a property owner.

Buying commercial real estate is fairly straightforward, but it can still be a confusing process, especially for first-time buyers. Working with the expert California REALTORS® at Berkshire Hathaway HomeServices California Properties will cover all your bases and provide general peace of mind through each step of the process.

Contact any one of our Commercial Associates today to get started.

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