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10 things to consider before buying a commercial property

By Zarah Mae Torrazo 14 October 2021 | 1 minute read

Here are the 10 factors to consider before you buy a commercial property.

commercial property

Investing in commercial property can be a profitable venture, as these properties generally offer potentially higher financial returns compared to residential properties. 

However, the greater rewards come with higher risk for investors.

There’s always the risk that a bustling location today may be a ghost town in a couple of years. Additionally, your cash flow can take a hit due to expensive repairs, tenants who don’t pay rent and so on. It may also be difficult to sell commercial real estate in a property slump.

That’s why investors need to have a good grasp of how commercial property investing works before diving headfirst.

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It’s important to understand that the factors to consider when buying commercial real estate are going to be different than those when you are planning to purchase a residential investment property. 

If this is your first commercial real estate transaction, you don’t want to rush into a decision without doing your due diligence. Before you sign on the dotted line, there are some essential things you need to consider so you end up with the right property for your intended purposes.

Below are things an investor should consider before buying a commercial property. 

1. Look for commercial properties that fit with your investment goals

As with any asset, you first need to think about what you want to get out of your commercial property investment. Taking a look at your purpose would help you decide on a purchase. 

For example, you may be looking to flip an outdated retail space or office. Or, if you’re thinking more about your long-term retirement plan, you may want to look for an investment opportunity that will give you a steady income over the next five to ten years, such as a shopping centre or a strip mall. 

There are multiple types of commercial real estate options, and they come in different shapes and sizes. Some of them include: 

  • Offices
  • Contiguous office space
  • Co-working offices
  • Industrial properties
  • Warehouse
  • Logistics building
  • Retail spaces
  • Shopping centre sites
  • Big-box retail

The type of property you consider will really depend on your individual goals. Make sure to talk to your real estate agent about your investment strategy so that they can strategically narrow down your options. 

2. Budget

Any investment venture that needs money should have budget planning before execution. This is also true for a commercial property transaction.

It’s vital for an investor to set a budget allocation towards the property’s purchase price, aside from other business-related costs. This will also help make the process of choosing the commercial property easier. 

If you are planning to take out an investment property loan, make sure to have a repayment strategy in place. 

3. Strategic location 

Location, location, location. You may think that this mantra only applies to residential real estate, but it’s far from the truth. In fact, finding the right location may be more important for a commercial space. 

Find a location with foot traffic and attention that makes sense for your future tenant’s needs. Research the local market segments to see which ones have strong earnings potential and strong demand.

The most important factor generally tends to be how easily accessible this location is for potential tenants’ customers or clientele. 

For example, if you are planning to buy a retail space and your target lessees are small businesses or restaurant establishments, make sure that your property’s vicinity has enough potential customers for your prospective tenants.  

But your research does not end there. An investor should also consider the various variables that affect the location, impacting the property’s value level either negatively or positively. Other factors to consider include:

  • Accessibility of the location
  • Location of the suburb
  • Population and zoning numbers
  • Businesses surrounding the property
  • The level of competition
  • Distance from public transport systems (train station, trams etc) 
  • Availability of car parking 

Note that these factors will mostly depend on the commercial property type and its respective needs. For example, if this is an industrial space, access to public transportation might not be your top priority. 

It’s also important to know the local council zoning laws and regulations and understand the type of businesses allowed. You don’t want to make the purchase harder than it needs to be.

If the property you’re looking at doesn’t meet the zoning requirements you’ll need for your purchase, you’ll end up jumping through more hoops than necessary after acquiring the property. If you’re purchasing a historic home to use as an office building, make sure it’s actually zoned commercial.

Furthermore, remember to check the local government area websites and scope out potential future development and plans that may affect your commercial property.

4. The physical condition of the property

A commercial property with good physical condition tends to attract more potential tenants.

Before buying commercial real estate, check the condition of the property. If you’re buying existing property, it’s also good to know the purpose the property was used for prior to your purchase. This will give an idea of the wear and tear this property must have gone through and what kind of repairs it might need in the future. This would also help understand the resale value or rent that could be earned in the future.

5. Limitations to modify

In some instances, there are laws and regulations that dictate restrictions on modifying the exteriors or interiors of a property. It’s important to learn the laws in detail and to also be clear of your requirements. Remember that these restrictions will also apply to your prospective lessee, so make sure that you have a good understanding of what are the limitations to modify so you or your property manager can provide proper guidance. 

6. Litigation on property

Before buying a property, make sure that it is free of any old or existing litigation. Common examples of commercial litigation include breach of contract, partnership disputes, class actions, and shareholder issues. If any such litigation is found on the property, the buyer gets a chance to re-negotiate or may also decide to back out from the deal immediately.

7. Check historical performance

When buying a commercial property, always research its historical performance, as well as that of other similar establishments, before buying into it. 

Make sure to check the yield and the capital growth performance of a particular type of property in the area you’re planning to invest in. While past performance is not a guarantee of future results, having a historical background of a certain will give you an insight into the asset’s strengths and weaknesses.

This data will also help you understand the current and future trends in the market, rent rolls, tenant profile, and any other information that may help you develop your investment strategy. 

8. Infrastructure projects 

Every suburb or LGA has its own infrastructure that underpins the growth of commercial properties. Government plans play a central role in determining how infrastructure will expand in a specific location.

Infrastructure, including roads, rails, airports, and hospitals, usually always positively affect an area’s value. There are a plethora of online sources that offer information on future infrastructure projects that investors can take advantage of.

For starters, make sure to check out Smart Property Investment’s News section for the latest property market reports, insights, and news. 

An area with a strong infrastructure plan can boost the demand for commercial property. For example, establishing a modern bypass would increase the need for a warehouse property in the area. This is because most transport companies prefer occupying these warehouses due to their access to affordable lands and good roads.

9. Know your finance options 

Financing a commercial property tends to be a more complex process compared to funding a residential investment. 

This complex process makes it a delicate task to take on and often leads to investors seeking help from a financial expert. The financial expert must ensure that the process is effective to help the investor get the funds and on time. 

Before you seek financial assistance, it’s recommended to seek a credit report review. After all, a poor credit report or delayed payment may hinder a lender from giving you a stamp of approval. There are several factors that will help a lender whether a commercial property loan should be greenlighted, including credit check, coverage ratio, down payment, and property appraisal. 

10. Commercial lease term 

The lease term is important in determining the type of commercial property an investor will purchase. A good investor must ensure that the lease term is long enough to recover the principal investment and generate the requisite profit. 

It’s always important to include a renewal option so that the lessee can secure the premise even when the lease contract expires. Additionally, it is advised to use a lease agreement that is updated to cover all local and state laws and regulations. 

The things to consider when taking a lease term include: 

  • Consumer Price Index, which affects the rental rate.
  • Lease terms can be 10, five, or three years with an option to renew.
  • Special council approvals, such as chemical treatment centres, medical facilities, and childcare centres.
  • When tenants install partitions on the property.

When buying a commercial property, you should not rush, fearing that you will lose out on a great investment opportunity. A good investor will always take time and do thorough research, considering the above factors to ensure that they will have profitable and sustainable results. 

Want to learn more about property investing? Tune in to our podcasts covering a variety of topics related to the real estate market. You can also follow Smart Property Investment on social media: Facebook, Twitter and LinkedIn.

 

RELATED TERMS

Property manager

A property manager is an individual or company hired to handle the day-to-day operations, maintenance and administration of a residential, commercial or industrial property on behalf of its owners.

Real estate agent

A real estate agent is a licensed professional authorised to act as a representative for buyers or sellers in a property transaction.

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