How to Purchase Commercial Real Estate Investments Step By Step
Investing in commercial real estate is very different from buying residential property. Much more is involved, and it is not just about the amount of the investment. The income for commercial real estate is usually more stable than residential property if you choose well because you have more than one tenant, and tenants usually sign up for longer terms. On the flipside, the demand for commercial property can fluctuate quite quickly, depending on development in the area, maintenance costs are higher, and it is harder to sell. That said, investing in commercial property is generally a sound one if you do it right. Here are the steps for purchasing commercial property.
Check the location
Location is very important for commercial property. The lease you can demand for one of your units will depend on the current foot traffic, and future developments in the area. Are there plans for malls or a BPO building for the area? Are you accessible to the target market? Is it s flood-prone area? Are you near an MRT or LRT station? Is there parking space? Are there zonal restrictions that could limit your tenant market? All of these factors will have an impact on the future income you can expect for your investment.
Do your due diligence
Once you have identified one or two good commercial properties, and before starting any negotiations on the price and terms, you need to find out as much as you can about them. Consult a lawyer and a real estate broker to help you do research on any potential legal or administrative problems with the property. Have the title checked to see if it is clean, and if the seller has the right to sell it. You can authenticate it by getting a copy of the tile from the Registry of Deeds and comparing it to the copy the seller will give you.
Your broker may have a team of experts on call to do a survey of the land and building to see if it corresponds to what is in the title. They can also check for any major structural problems, such as cracks in the foundation, faulty electrical wiring, and subsidence. Consult with an accountant about the applicable taxes for your intended purchase. You should also interview existing tenants about any issues they may have with the building, and note all of them.
Once you have all the information available, ask for a meeting with the owner to discuss prices and terms with you and your broker. Your broker will be able to advise you on how far you can reasonably negotiate the price down or demand better terms. Agree on a price that takes into account fees and taxes that will accrue from the purchase, such as capital gains tax.
Find the money
Unless you have ready cash on hand, you will need to finance the purchase. The conventional source of these kinds of funds is commercial banks, and they usually have the best rates and longest terms. However, they require a ton of paperwork, credit checking, and appraisals. The process can take several months. A quicker alternative are private lenders, but they only offer short-term loans at higher rates. Your broker can handle the paperwork required to get loan approval in either case, and advise you on the best loan option for your needs.
Sign the documents
Have a lawyer check every document you have to sign before signing it and before handing over your down payment. If you are borrowing from the bank, they will usually make a thorough check of the documents, such as a conditional deed of sale from the seller, as part of the approval process. However, it is good practice to let your lawyer go over everything before you make a commitment to buy.
Once you have gone through all five steps, your next move is to take over the management of the commercial property. You start making money right away from existing tenants.