Commercial real estate is a highly sought after investment opportunity for many entrepreneurs. It provides property owners with additional cash flow, benefits from different levels of economies of scale, and a diverse range of use for different types of businesses. The real estate market is highly competitive and owning the right piece of commercial property can elevate your portfolio. But how do you evaluate the best properties? And what steps must be taken to own one?
Evaluate What You Are Looking For in Commercial Real Estate
Before making the leap into real estate investment, you must consider your needs and your business’s future. Here are a few things you may want to ask yourself:
- What kind of property are you looking for? Income-producing or value-add?
- Are you looking for a building for your own business, rent out, or build equity?
- What location works best for your needs?
- How much money and time are you willing to commit to the property?
- What is your risk tolerance?
Keep Up with Commercial Real Estate Vocabulary
When it comes to commercial real estate, there are a number of words and acronyms to know. It’s extremely helpful for investors to learn these terms for a more successful investment process. Some common terms include:
- Loan-To-Value (LTV)
- Debt Service Coverage Ratio (DSC)
- Capitalization Rate or Cap Rate
- Cash on Cash
- Internalized Rate of Return
- Vacancy Rate
Evaluate Financing Options
Aside from conventional loans, SBA loans from the U.S. Small Business Administration are an option to consider. There are two types of loans where you can receive commercial real estate financing: the SBA 7 (a) loan and the SBA 504 loan.
- The SBA 7 (a) loan gives business owners a lot of flexibility in how they can use their funds. It is provided by a single private commercial lender, with 85% of the loan amount guaranteed by the SBA.
- SBA 504 loans aren’t quite as flexible as the funds must go towards purchasing real estate or machinery and equipment, renovation, or construction. The 504 loan is provided by two lenders: a private commercial lender, which provides 50% of the project costs, and a certified development company, which provides 40%. All of which is then guaranteed by the SBA.
If you already own commercial real estate, you may be able to use existing equity to make your purchase. This involves borrowing against the value of your property through an equity line of credit, equity loan, or cash-out refinance. This option tends to have the potential for low-interest rates.
Ensure You Have The Right Support Behind You
It’s never easy finding the right real estate for your business. By hiring a commercial real estate broker you will be given the resources and guidance on which properties may fit your business’s requirements. Real estate professionals will be licensed by the state to handle different responsibilities, including landlord-tenant transactions, property research, and property management. With their knowledge of the real estate market and time-management prioritization, hiring a real estate broker has cost-saving potential.
Due Diligence and Escrow
Once you make an offer that is accepted, you may need to get an ALTA (American Land Title Association) survey ordered as part of due diligence. The survey will provide important information about the property such as boundary lines, location, possible improvements, and identification of easements (water, gas, phones, railways, etc.).
The transaction will go into escrow, where a neutral 3rd party officer will oversee the transaction. They will help the seller and buyer with the transfer of deeds and funds while protecting the overall transaction. The final escrow documents will include things such as:
- Quitclaim deed
- Non-foreign affidavit
- Title affidavit
- Bill of sale
- Sale and assignment contracts
- Supplier guarantees
Invest in Commercial Real Estate with Plaza Companies
If you’re looking for the right property to invest in, Plaza Companies has you covered. With more than 100 properties in our portfolio and almost 40 years of experience in selling, leasing, and managing a diverse portfolio of buildings, we are the right choice for commercial real estate investing. To get started on your real estate investment journey, contact us today.