What to Consider Before Buying Your First Commercial Property

The factors that matter most to you when buying commercial property are going to be different than those for another buyer. Especially if this is your first commercial real estate transaction, you don’t want to rush into a decision based on something someone else has done. While in the consideration phase of buying real estate, there are some essential things you’ll need to ask yourself, so you end up with the right property for your intended purposes.

What Type of Property Are You Looking For?

When you think of a commercial property, an office building might come to mind, but there are a lot of other types in and around Denver, CO, that are considered commercial, such as:

• Hospitality – These are motels, hotels, and even short-term rentals.
• Industrial – This includes storage facilities, distribution centers, warehouses, and other similar factory-style properties.
• Multifamily – These would be your smallest duplexes and your largest apartment complexes, including properties containing multiple large complexes.
• Office – This includes one single office on the corner of a street, as well as skyscrapers.
• Retail – This would include restaurants, shopping malls, copy shops, and grocery stores.

Perhaps you’re unsure right now what type of property you want to invest in. That’s OK! Perhaps taking a look at your purpose would help you decide on a purchase. For example, are you hoping to fix up the property and flip it? If so, a small motel might be a great option. Do you plan to run your business from the property you purchase? A skyscraper might be your number one choice. Some other investment options include:

• Development – Turning raw land into a functioning commercial building.
• Land Banking – Purchasing a large portion of land in hopes developers will come along after it has appreciated in value.
• Passive Investing – A buying-and-holding strategy for long-term situations.
• Value-Add – Buying, rehabilitating, renting, and refinancing a property, then repeating the process.
• Wholesaling – Putting a property under contract, then selling the contract to another investor.

Is the Zoning Correct for Your Purposes?

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.

There are also specific zoning requirements for specific types of commercial properties. For example, if you’re turning the property you purchase into a restaurant, check to ensure the property is aligned with the specific zoning requirements for restaurants. Start with city zoning requirements and work your way up through higher government levels until you’ve satisfied them all.

Do You Know How to Underwrite an Investment?

You don’t ever want to just take someone else’s word that a property is going to make you money. Underwriting commercial real estate is a great skill to have. You could take a Certified Commercial Investment Member course to get started. In the class, you’ll learn how to analyze financials, determine user criteria, research markets, and make smart decisions. After a CCIM course, you should be able to quickly and easily calculate an expected return on any commercial real estate purchase.

Once you’ve got those underwriting basics, you’ll want to practice them often. Underwriters charge thousands of dollars for one real estate deal, which is going to quickly drain you of any down payment you’ve saved up. If you can do it yourself, you’ll save a lot of money. Underwrite one deal each day in Denver or the surrounding areas. This gives you an opportunity to fine-tune your skill, but it’ll also give you some ideas on why you would or wouldn’t pursue certain properties.

Are You a One-Man Team?

As a one-man team, you’re not going to have the expertise required to make the best decision when buying commercial real estate. There are five professionals you should add to your investment team.

1. Attorney – A commercial real estate attorney is going to become your best friend when it comes to understanding zoning restrictions, issues regarding the environment and land-use, or negotiations. He or she can also review the sale to ensure it’s fair.
2. Broker – Your broker will find the deals that fit within your specific purchasing criteria, though you should still underwrite every option.
3. Contractor – A contractor who specializes in commercial properties will be able to spot all the maintenance and repair items that will be needed, and give you an accurate idea of the expenses.
4. Lender – You may want to have a relationship with multiple lenders because they all have different criteria when it comes to buying commercial property.
5. Manager – Even if you don’t end up using a property management company after your purchase, a commercial management company can assist you in determining the pros and cons of the property.

Have You Looked at Multiple Properties?

In most cases, the first property you look at isn’t going to be the best option. As you look around, underwrite some of your options and discuss each scenario with your team of professionals, you may begin to find issues that are important to you but that you hadn’t considered previously. There’s always a chance you’ll go back to that first property, so you don’t need to completely wipe it off the list, but you should always take a second and third look at any property you get serious about.

Does the Property Come With Current Tenants?

Maybe an empty building is part of your criteria for purchasing real estate, but have you considered what you’d do if you purchased a property with current tenants? Some of those tenants might be in contracts and should be allowed to stay on the property until the contract is up, though it does depend on the terms of the contract. Read through any contracts for current tenants. Is their agreement void upon the owner selling the property? Do you have to uphold the contract? Can you give the tenants a 30-day notice?

Perhaps you want the tenants to stay. There are some things you should consider to ensure they do. Could you afford to lower the rent? Is there a discount for tenants who have been there ten years or more? Are there maintenance fees you could wipe out? Anything you do that saves the tenants money or improves the situation they were in with the previous owners could play in your favor.

Getting a Jumpstart On Your First Commercial Purchase

As you can see, there are a lot of factors to consider when buying commercial real estate for the first time. The good news is once you get a handle on what you’re doing, you can streamline the process to become a stronger and smarter investor. 

Have You Chosen an Investment Strategy? 

Buying commercial property isn’t something you can do to ad-hoc. That is, you need an investment strategy that enables you to reach your ultimate goals. By choosing a strategy, you’re creating a framework on which you make sound investment strategies.  

Earlier, we briefly went over some popular investment strategies: 

• Development 
• Land Banking 
• Value-Add 
• Passive Investing 
• Wholesaling 

While each of these is a perfectly suitable investment strategy, we’re going to focus on the first three listed. These three strategies demonstrate a range of time- and money-intensive ways to help your commercial real estate portfolio 

What Is the Development Investment Strategy? 

The development investment strategy is for those tolerant of high quantities of risk. It has the potential to generate the most amount of wealth. That potential, though, is paired with an equal possibility of losing your whole investment.  

With development investing, you must have a vision because you’ll be turning raw land or existing property into something entirely new. You’ll need to rely on your team and stay informed to ensure you’re following the right process for success: 

1. Buy the Land – You’ll need to consider demographics, topography, traffic, utilities, zoning, and, of course, location, to choose the right property for purchase. 
2. Create the Site – Your team of architects, engineers, and sales will help you craft marketing strategy, design the building’s layout, and determine project feasibility. 
3. Secure Financing – Presenting your team, financial partners, and project history will help you get any additional funds you need for the project. 
4. Supervise Construction – Picking the right general contractor is critical to ensuring the project is built along the stated timeline and up to your standards. 
5. Market the Property – Getting pre-sales and pre-leases can help develop sales momentum and reduce risk. 

What Is the Land Banking Investment Strategy? 

If development sounds too hands-on, you should consider a land banking investment strategy. With this strategy, your goal is to secure a property that sits in the way of a current or growing development. Your property will increase in value as the development expands towards your land. Once the development runs up against your property, you can sell it to the developer or partner with them on their expansion. 

This investment strategy requires little work on your part. The process is straight forward, with some upfront research paying off in long-term wealth growth: 

1. Qualify the Land – Do your research on the city’s zoning laws, as well as their intentions for public or private property, to identify undervalued land that future developments may need for growth. 
2. Decide on Financing – There’s flexibility in this strategy to purchase the property in cash or secure outside financing.  
3. Prepare for the Future – To keep your land highly valued, make sure to maintain its aesthetics as needed. If you find yourself itching for some action on your property, you can start to think about developing it yourself, which may add to its value should a developer find they need it more. 

What Is the Value-Add Investment Strategy? 

Value-add investing is ideal for people who want to keep their money moving. With development and land baking strategies, you’re often left waiting to pounce either on a property or opportunity. The value-add strategy helps you develop a continual cycle of buying, rehabbing, renting, and refinancing. 

1. Buy a Property – You want to purchase an undervalued property for this strategy to work. Some distressed-seller situations are suitable for finding those types of properties. 
2. Renovate the Building – Renovation here doesn’t mean tearing down the walls and starting a new. Updates like interior and exterior paint, new flooring, and modern lighting can add perceived value without being too much of financial investment. 
3. Rent Units – Finding a property management company can help find suitable tenants and keep them happy. 
4. Refinance Your Investment – If you’ve done the above steps right, you’ll be able to refinance based on the capitalization rate and pull your initial investment out of the building while still receiving income from rental units. 
5. Repeat – Now that you’ve got your capital back from the initial investment, you can do this process all over again and add more properties to your portfolio. 

Are There Other Investment Strategies? 

The two investment strategies we mentioned earlier that we didn’t yet delve into deeper are wholesaling and passive investing. Both strategies have their advantages, especially if you’re not looking to manage or develop a property. 

With wholesaling, you’re looking to find existing commercial real estate properties that are undervalued. Once identified, you purchase the property, then sell it to either another real estate investor or an owner-occupant. Your goal isn’t necessarily to fix, rehab, or renovate the property. Instead, you simply want to engage in commercial property buying because its location, property class, or asset type indicates the property is worth more than you paid for it. 

Passive investing is very hands-off. With this strategy, you purchase property, or partner with others to purchase property, without becoming responsible for managing the property. This type of investing can be done through investment tools like Real Estate Investment Trusts (REITs) or even real estate crowdfunding. Your passive investment then leads to passive income. 

What Else Should You Consider Before Buying Your First Commercial Property? 

Buying your first commercial property can be a daunting feat. With the right investment strategy in place, though, you can make informed decisions about where to place your capital. 

If you’d like help in getting a head start on purchasing your first commercial property in Denver, CO, contact Unique Properties, Inc. You can also call us at 303-321-5888.