Three Important Basics to Understand Before You Buy Any Commercial Property
As a commercial real estate lender with more than two decades of experience, Extensia Financial has advised countless investors on how to get into commercial real estate. Before you buy commercial property, it’s critical you understand what commercial real estate is, the major factors to consider, the types of commercial real estate available and the basic steps to closing the deal on an investment property.
Commercial real estate is property ownership that’s used almost exclusively as a business. Typically, the owner leases out parts of the property to tenants (ex. apartments or offices) to generate income. Commercial real estate properties can range from large residential rental properties to shopping malls.
1. What to Consider Before Making Your First Commercial Property Investment
If you’re interested in making a commercial property investment, there are several key factors to consider:
- Location, Location, Location
The surrounding infrastructure and neighborhood can impact your property value and the income it generates. Find out if there are similar businesses nearby, if there’s a customer base in the area and what the zoning laws are for the location.
The type of classification can determine the level of risk when purchasing. There are three classes: Class A, B and C. Class A buildings have lower risk than Class C buildings, which have a high-risk level.
- Physical Condition
Conduct a commercial inspection to ensure the property and/or building does not have any environmental liability issues or needs extensive repairs. When you buy a building, understand what it was previously used for.
- Financing Options
Determine the type of commercial real estate loan you can secure given the type of investment and your chances of approval. The options typically include conventional mortgage, bridge loan, SBA 504 loan and hard money loan.
Consider expansion potentials. Is the location large enough to accommodate business changes and/or growth in the future? This is an important consideration.
2. Know Your Types of Commercial Real Estate
There are six major types of commercial real estate that investors look to when buying commercial property:
Multi-family properties include apartments, condos, co-ops, and townhomes. Each can be classified into Class A, Class B or Class C, and separated into six categories: High-Rise, Mid-Rise, Garden-Style, Walk-Up, Manufactured Housing Community and Special-Purpose Housing
Office buildings are categorized into urban and suburban buildings. When you buy office space, it can house a single tenant or multiple. It’s classified into three tiers, including Class A (luxury office space), Class B (mid-range finishes) and Class C (functional space).
Retail commercial real estate comprises all shopping and restaurant uses. They can be malls or shopping centers, lifestyle centers, factory outlets, power centers (big box stores), community centers, neighborhood centers, shops, convenience stores and more.
Industrial property is typically found outside urban areas and can be categorized into four types: Heavy Manufacturing, Light Assembly, Bulk Warehouse and Flex Industrial
The hospitality sector includes properties that provide accommodations, meals, and other travel services. These include limited-service, full-service, boutique, casino, extended-stay and resort hotels.
- Special Purpose
Special purpose commercial real estate covers all other types not mentioned in the aforementioned five categories. They can include operations such as amusement parks, zoos, churches, schools, self-storage and more.
3. How to Buy Commercial Real Estate Made Easy
Buying commercial real estate is more complex than purchasing a residential property. Here are the five basic steps to investing in commercial real estate:
- Educate Yourself
Begin by conducting research on how to invest in commercial real estate. Read several commercial real estate books, take educational classes, meet with investors and join real estate investing groups.
- Assess Investment Options & Secure Financing
Assess the six types of commercial real estate options and determine which is right for your business goals and financial means. Then, secure commercial real estate financing through an experienced commercial real estate lender, such as your local credit union. Extensia will help walk you and your credit union through the entire lending process to make it easy to understand and streamlined.
- Surround Yourself with the Right Team
Because the process can be complicated, employ a team of professionals. This should include a commercial realtor, accountant, commercial real estate attorney, Extensia, your credit union and a tax attorney.
- Find the Right Property
Team up with an experienced commercial realtor, and shop around for the property that will meet your criteria (ex. square footage, location, taxes, zoning and more).
- Make an Offer & Close the Deal
When you find the right property, ask your commercial real estate agent to write up an offer. Have your attorney review it and submit it to the seller. Ensure the offer has a due diligence period with an escape hatch if inspections fail. When you come to an agreement with the seller, you can close the deal, making you an official commercial real estate investor!
About Extensia Financial
Established in 1998 and headquartered in Simi Valley, CA, Extensia Financial offers competitive and collaborative commercial real estate loans. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire commercial real estate investment process. Extensia Financial is a proud member of the AVANA Family of Companies.