Are you planning on buying your first commercial property? If you are, I’m sure you’d be facing a lot of confusions and you probably lack clarity on how to get things done. Well, first of all, let me tell you that there’s nothing wrong with your stress and it’s totally normal! Everybody has a start! You’ve got one for you too. Even the top most real estate investors from around the globe would have started at some point of time. Even they would be confused with their decisions and how to go about it. So, don’t worry. We’ve got your back. Hang in tight to discover some of the “Must-Know” rules before you purchase your first commercial property.
Adding to your prevalent stress is the myth that getting into real estate industry and purchasing your first commercial or residential property is a tough deal. Well, the sentence has it – It’s a myth! Need I say more? So here’s the myth bursting truth – NO, it’s not really tricky to get into the real estate industry. Neither is it any harder to purchase your first commercial property if you get your basics right and if you take just-a-little-care in the entire process. Now, what do I mean when I say just-a-little-care? I don’t mean to say that you must be familiar with all the nitty gritty of the real estate industry. If you are really passionate about it and do it out of interest, it’s commendable! But if you’re in the industry just for investing and getting good returns, which is true for most people, just being familiar with the basic rules would suffice.
You don’t need to be an expert in the field to make more money. You just need to be familiar with some concepts and points that you have to remember. Or even better, you can always rely on the expert advise. Why are we for, right? With decades of experience and knowledge in the world of real estate industry, we can totally help you out, be it getting you through the entire process or just lending in some good advice from our team of experts. Here’s a list of points you have to remember before purchasing your first commercial property. Let’s get started now!
Point # 1 – Get clarity on what sort of property you are looking for
Now as many people in the industry say, there truly are big fish like blue whale and sharks in the real estate industry. Many a time, if you’re going to seek advices from the wrong people, chances are you’d get tricked into buying property that is less profitable for you in the long run. Understand the first rule. If you’re just a beginner and it’s your first commercial property, it’s not hard for people who wish to cheat you to throw a wild guess that you probably don’t have too much to invest. So they would, in most cases, try to trick you by persuading you to buy a property that’s left not purchased from long periods of time. They’ll sell it to you at cheap rates and you’d come home happy. But only years later will you know that you’d been tricked!
A lot of investors have been tricked by the real estate agents into buying less profitable, or sometimes, non-profitable commercial properties. So, don’t fall into that trap! Even if you do count on the advice of your dear friend, ensure that he has genuine intentions to help you out.
So how do you actually prevent yourself from getting tricked? Not relying on anyone’s advice at all is not an option. Come on, you will need advices. The best solution is to get clarity on what sort of property that you want to invest it. ( Of course, you’ll be able to get an idea about this only when you weigh the pros and cons of investments in different commercial properties)
Ask the following questions up front to prevent yourself from getting tricked and to get good clarity:
What is the location where you want to invest?
How much extra work will you be willing to put into your commercial property?
What’s the purpose of your commercial property purchase? Is it for your own business? Is it for renting out? Is it for leasing out? Or just resell, perhaps?
Are you going to buy it all by yourself or you’re interested to invest with other partners? ( Needless to say that both the situations have their own set of pros and cons. Taking a wise call here is of utmost importance)
What sort of experts are you willing to take advices from?
Do you have any information that says that the property you’re interested in has good intrinsic value? If yes, can you rely on the authenticity of such information?
What is your risk-return pattern? Do you wish to invest in high risk, high return property or low risk, low return ones? (What about, low risk-super high returns? Oh! There’s nothing like that in reality! :-p)
Point # 2 – Consider all your options
Let us admit that most of us go window shopping and have a look at, at least, say 3 showrooms to buy anything that we want. So, why not apply the same rule here? In fact, you must consider all your options here and not most of them! It involves huge funds and this decision of yours is going to decide your financial future in many ways.
In real life, there are many investors who probably trusted an agent so much that they left the decision making to the agent, only to regret later! If you don’t want to end up like one of those investors who say, “Only if I’d known that option earlier” or “Only if I did my part of research before I invested, I would have made much more profits”, you must do your homework! You’d really be foolish if you don’t consider your options because, at the end of the day, this decision of yours could be a game changer for you in your life.
Consider and go touring to many different commercial properties available in the desired location. Needless to say that you must compare different properties on various aspects like location, price, proximity to economic development and so on. One important point to note here is that the location is extremely crucial. Generally, the properties that are located near downtown areas, hospitals and universities will have higher value and are what they call, fast-selling properties. If you bump on to one of those and it fits your budget, it’s a way to go! So, do your homework and consider not many, but all options before you take a final call. Especially if it’s your first commercial property, chances are it’ll be a great learning experience for you!
Point # 3 – The key-calculation
One of the important things many people won’t tell you is that you need to invest in a property that’s going to fit right into the key-calculation. And if they already are aware that it’s your first commercial property, chances are they’ll try to trick you. There are some properties that earn a really good amount of money. You can see the big picture of you counting your fortune of money. Well, your friends or advisors are not lying to you. You will earn a great amount of money by investing in particular properties. But what they are not telling you is that these high return commercial properties come with a lot of expenses that are too much to bear! So, what’s the whole point if your revenue is great? Your expenses are great too! It’s as good as investing in any other property that fetches medium returns. At least, in the latter case, you’re saving your initial investment costs.
So here’s the key-calculation for any of your commercial property. The amount you earn is not what you are actually earning. Your true earning is the profit you make after deducting all related expenses. One of the obvious expenses is what we call PITI in the real estate industry. Principal, Interest, Tax, and Insurance. These are the 4 common and major expenses. So you must be looking at properties that promise you good returns after you deduct PITI and are still left with good money! This is something many people conceal from first timers and you’ve got to watch out on! So, don’t get tricked by looking at large money. Also look at the related expenses. After all, it’s not fun to invest loads of money in a property that also has many deductibles. As the saying goes, “It is not the turnover (earnings or revenue) that’s going to matter, but what is leftover (profits) that’s most important”.
Point # 4 – Find the experts whom you’ll need
We don’t want to scare you by telling the cliched dialogue that buying commercial property is a complicated process. But at the same time, we’ll not lie to you that you’ll be able to handle it all by yourself. No matter how much you research or study or watch a video, you’ll still need experts for various reasons. And as I already told you, this entire process of buying commercial property beginning from deciding which property to buy to the legalities of being the legal owner of the property, could be a game changer for you in your life! So, you don’t want to risk it by confiding only in yourself right? At the very least, you’ll have to hire a commercial real estate lawyer, mortgage brokers, an accountant and a commercial realtor.
If the property you choose is more complex, you’ll also need other experts like tax experts, engineers, lawyers, notaries, environment specialists and so on. Also, this list is not exhaustive and could have a couple of other experts also on whose advice you must take things forward. Acknowledge the fact that while there is some research you can do it on your own, there are many that’ll probably require experts!
Point # 5 – What are your financing options?
Before you purchase your commercial property, you need to figure out the way you’d be financing it. If you’re not among those millionaire people who can just do by self-financing, you’d probably need to spend some time here. There are various banks, co-operative societies, credit unions, home mortgage companies from where you can source your finances. You must consider a lot of factors and weigh the pros and cons wisely. It’s highly recommended that you take the advice from experts in the field who could help you with choosing from the various lot of financing options you’ve got.
There are many people who have lost too much money in the real estate industry because they had paid less regard to their financing options. They ended up in losses unable to repay the high interests and the principal amount within a stipulated period of time. Don’t do this commonly made mistake which’s going to give you a bad experience! Well, we all learn from experiences. But wait..we can always learn from the experiences gotten by others right? So why waste time in making wrong decisions and going about it all over again? Consider different financing options and take a call only after you’ve weighed the pros and cons with the help of experts!
Point # 6 – Due diligence and the escrow
Well, here’s where it’s going to get a little confusing and what they choose to call it, complicating! You need to take care of a lot of points in getting the exact legalities done for your property. Here are some basic points to know before you purchase:
In most cases, you’d get an ALTA which is American Land Title Association surgery ordered. This ALTA survey provides many details about your property such as boundary lines, location, soil testing and so on.
You, along with your seller must find an escrow officer. This escrow officer is going to act like a neutral 3rd party and helps you with transfer of deeds, documents, and funds. Their duty is to protect the interests of both the parties involved.
You, as a buyer will be given due diligence period which must be utilized by you to ensure that all the documents submitted are correct and trust to the best of your knowledge. Here’s why you need to triple check that everything told to you by your seller is true!
So, these were 6 most important points to remember before purchasing your first commercial property. Buying a commercial property is truly quite a task, but with these tips from experts, the entire process becomes a cake walk! Watch out for the fraudulent transactions and deceiving advices. Good luck with your first commercial property buying experience!