1. Ask Yourself these important up front questions
Knowing yourself, your situation and what you are looking for is the first step to owning your own commercial real estate property. Below are some questions that you should ask yourself:
• What type of commercial real estate property are you looking for?
• What is your intended use for the commercial property, is it house a business, build equity, rent it out or something entirely different?
• What locations do you consider prime for your intended use of the commercial property?
• Are you willing to buy or lease a commercial property?
• Are you willing to get a partner in owning or leasing the property?
• Are you able to finance the property or make an initial down payment?
• To what extent are you willing to take risks?
• What is your time commitment to the property?
• What knowledge and skills do you have?
• Do you need to hire experts with specific a knowledge-base?
• Are you willing to undertake the responsibilities of a landlord?
• Do you need a property manager?
• Are you ready and willing to make such as huge financial investment for a commercial real estate property?
2. Learn Vocabulary Associated with Commercial Real Estate – and appreciate the learning curve
There are plenty of professional terms associated with commercial real estate that you may be unfamiliar with. It is advisable that you get familiar with the real estate industry. Te get you help started, here is a list of common terms that you are likely to encounter:
LTV (Loan to Value) – This is the ratio of how much money you are borrowing verses the total value of what you want to buy.
Debt Service Coverage (DSC) – This is the operating income over the total debt amount. It basically shows how much debt you can cover with each year of income.
Capitalization Rate – This is the property’s income over the value of the commercial property.
Cash on Cash – This is the total annual before-tax cash flow to the total amount of cash invested. The amount invested can sometimes be just the initial down payment.
Vacancy Rate – This is the percentage of the property that is vacant within the given property area.
Usable Verses Rentable Square Feet – Refer to the article on Usable Vs. Rentable Square Feet
Ad Valorem – This is the tax amount that is based on the property value.
3. Do Your Homework on a Number of Properties and Visit Each One of Them
You should consider a number of properties and ensure that you visit each one of them before settling on one. Find out the pros and cons for each of the properties and consider important factors about each of them such as price, condition, location, and allowed uses for each of the properties. We cannot stress this enough, that properties located near hospitals, universities and downtown areas will sell more quickly and have a higher value.
You should research and settle for a property that best fits your needs. Your requirements are unique to you and the property you settle for should fit your intended use, price, location and investment that is required.
The key calculation for a good property should be in the black after deducting the principal amount, interest, tax and insurance (PITI) from the annual rental income.
Here is a list of a number of questions that you should consider for any property that you are interested in:
• What is the property’s current use?
• What can or can’t the property be used for?
• What rental income does the property generate on an annual basis?
• What kind of property taxes does it incur?
• Are there any repairs and replacements pending or will be needed soon on the property?
• Why is the property being sold by its current owner?
• What is the property’s current environment and are there any major changes expected soon?
4. Seek Expert Help
The process of buying commercial property is often a complex process and expert opinion can help in some important steps and make the entire process much easier. The experts to hire and their expertise will largely depend on the type of property that you are going to buy.
You might need to get a commercial real estate lawyer, an accountant, a commercial realtor, as well as a mortgage broker. For complicated properties, you might require the services of a tax expert, lawyers, accountants, appraisers, environmental specialists, engineers and notaries.
There are a number of things that you can research and do on your own , but it does not hurt to get an expert and for the amount of investment you are about to make, it is always advisable to do so.
5. Determine Your Financing
Like most people, you will most likely require some sort of financing for your property. Whether you are seeking help from banks, home mortgage companies or credit unions, you will need to determine what kind of credit you have, what you can get and the interest it accrues.
In a case where these traditional methods of financing do not apply to you, there are always alternative methods of financing or purchasing a property. You should be familiar with terms such as subject-to, seller carry-back, lease options and second mortgages.
6. Upon the Approval of your Lawyer, Make an Offer.
Never sign any documents without the consent of your lawyer. Your lawyer will guide you through signing your letter of intent, and any contracts involved in the entire process. The letter of intent generally highlights the terms of the transactions and it is not normally a binding agreement. Your lawyer should explain in detail the particulars of all written agreements so that you are fully aware of you rights and obligations during, before and after the tenure of the contract.
7. Escrow and Due Diligence
This is where an actual transaction takes place and things get a bit more real. You might require to order an American Land Title Association Order which is used as part of the due diligence. This survey provides vital property information regarding building locations, boundary lines, improvements and easement identifications (These are the access rights by utility and service companies such as telephone, gas, water, railway, etc).
Some transaction use the services of an escrow officer who acts as an unbiased third party to oversee the transaction. An escrow officer ensures all parties and protected during the transaction and helps with the transfer of funds and deeds.
The documents that will be included in the final closing escrow may include the title affidavit, a quitclaim deed, bill of sale, a non-foreign affidavit, assignment and sale of contracts, supplier guarantees and warranties.
As the buyer of a commercial property, you should observe due diligence in due time in ensuring that all property documentation is correct and up to date. Triple check everything about the property including utility and service contracts, environment reports, surveys, rent rolls, restrictions, covenants, etc. In case of any disparity with what the seller initially promised or stated about the contract, you have the right to cancel the transfer of funds.
Following these steps can make the process of buying a commercial real estate property much easier and smoother.