6 Essential Steps to Purchasing Commercial Real Estate

Acquiring commercial real estate (CRE) may seem daunting due to the numerous considerations involved. However, with a structured approach, this process can be streamlined into six manageable steps: identifying the property type, defining your investment strategy, securing financing, assembling a professional team, locating a property, and executing due diligence.

Understanding Commercial Real Estate

Commercial real estate encompasses various properties utilized for business purposes. Common categories include:

• Retail Spaces: These areas serve businesses selling products directly to consumers.
• Office Buildings: Facilities for businesses to conduct their operations, varying from single-tenant homes to multi-tenant skyscrapers.
• Industrial Properties: These sites support industrial operations, often situated outside urban centers for logistical advantages.
• Multifamily Residences: Properties such as apartments or condominiums that house multiple families.
• Self-Storage Facilities: Locations providing storage units for customer use.
• Hospitality Properties: Establishments like hotels and bed-and-breakfasts designed for lodging and customer experiences.
• Raw Land: Unimproved land designated for future development or investment.

Step 1: Identify Your Property Type

Before navigating the purchasing process, it’s critical to determine which type of commercial property aligns with your investment goals. Each category has unique characteristics that can significantly affect its investment potential, including market demand and maintenance costs.

Step 2: Define Your Investment Strategy

Choosing a clear investment strategy is crucial for successful CRE ownership. Common approaches include:

• Fix-and-Flip: Buying, renovating, and then selling a property for a profit.
• Wholesale: Acquiring properties at below-market prices and reselling them.
• Owner-Occupied: Living in part of the property while using the rest for business.
• BRRRR: Buy, rehab, rent, refinance, and repeat—a cyclical strategy focused on rental properties.
• Buy-and-Hold: Investing in properties to benefit from appreciation over time.
• Development: Purchasing land with plans to build new structures.

Step 3: Secure Financing

Once you’ve pinpointed your property type and investment strategy, the next step is to arrange financing. Most investors find securing a loan essential. Here are steps to follow:

1. Obtain lender pre-approval to demonstrate your credibility as a buyer.
2. Explore loan programs available, including traditional commercial real estate loans, hard money loans, and others.
3. Shop around for quotes from various lenders to find the best terms.
4. Evaluate your financial qualifications, including credit score and revenue.
5. Submit your application along with the requisite documentation for loan approval.

Step 4: Assemble Your Professional Team

Taking a collaborative approach by engaging professionals can greatly enhance your CRE experience. Consider building a team consisting of:

• Commercial Real Estate Agent: To help find and negotiate properties.
• Real Estate Attorney: For legal guidance on contracts and agreements.
• Accountant: To assist with financial analysis and statements.
• Contractor: To carry out repairs and renovations as needed.
• Property Manager: To handle tenant relations and property upkeep.

Step 5: Find a Suitable Property

Your next task is to locate a property that promises a favorable return on investment. When evaluating potential properties, consider factors such as:

• Location: Proximity to amenities, zoning, and community trends can affect property performance.
• Financial Performance: Assessing current financial statements and future income potential.
• Market Trends: Economic indicators and local market conditions that signal opportunity or risk.

Following your research, submit a formal offer, typically as a letter of intent (LOI) detailing preliminary terms.

Step 6: Conduct Due Diligence and Finalize Financing

If your offer is accepted, proceed with conducting due diligence. This process may involve:

• Reviewing financial records and conducting property inspections.
• Finalizing your financing with the lender based on the agreed purchase details.
• Signing the necessary closing documents to complete the transaction.

Upon fulfilling these requirements, you will officially gain ownership of your commercial property.

FAQs

What credit score do I need to purchase commercial real estate?

A minimum credit score of 660 is often recommended to enhance your chances of securing a loan.

What is the repayment term on a commercial real estate loan?

Repayment terms can extend up to 30 years, varying by lender and loan structure.

How long does it take to get a commercial real estate loan?

Loan funding may take 1-2 weeks for straightforward cases, while more complex scenarios could take 30 days or longer.

Conclusion

Purchasing commercial real estate doesn’t have to be overwhelming. By following a systematic approach, you can navigate the process efficiently, leading to substantial long-term benefits and revenue generation. If you are considering entering the real estate market, utilizing these steps can help position you for success.