Investing in commercial real estate comes with a number benefits, but choosing the right commercial property requires a certain level of knowledge. Simply having enough capital to make the purchase isn't always enough — it's important to understand market conditions and consult the appropriate professionals, as well.
If you're considering a commercial real estate investment, follow these tips to make sure you're making the best decision possible:
Seek insider knowledge
Making great real estate investments requires learning more about the industry and the market. Understand that commercial property has a different method of valuation than residential property. The income you'll receive from your commercial real estate will correlate directly with the building's usable square footage, which is not the case with residential real estate. Leases on commercial properties are usually longer than those on single-family residences, which generally delivers a bigger cash flow. In addition, know that commercial property lenders usually ask for 30 percent down before approving a loan, so make sure you're able to handle a sizeable down payment.
Assemble a group of experts
To increase your chances of finding the best investment, it's best to contact the experts for advice. Find an accountant to discuss the financial aspects of buying real estate, a lawyer to help with any contracts necessary for leasing or buying property, a mortgage broker to help obtain the necessary funding and a realtor to keep you up-to-date on any attractive properties in the local market.
Choose your property
Prior to making your decision, consider each property's location, condition, accessibility to suppliers and clients. Find out which uses are permitted by businesses using the property and look into leasing and reselling options. Perform a title search to make sure the property you're considering is not compromised by a preexisting agreement before checking the zoning laws to confirm that your type of business will be allowed. It's possible that certain infrastructure adjustments or city planning requirements will affect the property's viability, as well.
Secure financing and buy the property
Make sure you have enough for the down payment before applying for a mortgage, in addition to proof that your income is enough to make your monthly payments. Understand what the terms "Debt Service Coverage Ratio" (DSC) and "Loan-to-Value" (LTV) mean, and use them to compare loan rates and terms. Ask an attorney to thoroughly explain your sales agreement before it's finalized to make sure there are no surprises. Once you're sure you understand your contracts, it's time to buy the property.
While it can be a complex process, investing in commercial real estate can yield tremendous long-term results. Keep these concepts in mind as you begin your search.