Ready to Buy Your Commercial Real Estate? Some Easy Steps
Now that you’ve looked into diving into the commercial real estate world, you’re probably wondering about the process. It may seem overwhelming, but if you break up your purchase into multiple steps, your task will become much easier whether you’re in the Decatur, Alabama area or elsewhere.
Step 1: Know What You Want
-What are your goals? Do you want to rent out a property, place your own business there, or redevelop? Which business niche are you looking to get into? Sit down and ask yourself if you want to buy a strip mall to rent out to local businesses or a warehouse to occupy with your own venture. Maybe you want to rent out offices–where’s the best location to ensure success? Or perhaps you want to tear down an old eyesore and build your own catering business on the lot. You’ll also want to make sure you want to buy rather than lease a property from someone else, if you’re looking for a place to base your business.
-What’s your financial outlook? Knowing whether you can afford a down payment and a loan payment is important, of course, but so are other financial questions such how much risk you can accept. Investing always comes with some amount of financial risk. Also, would you be willing to enter a partnership with someone else on the property and split your income, as well as the amount of work?
-How much are you willing to do? Sometimes, properties need work, and you’ll need to spend some time and energy on them. Are you willing to hire a property manager or a contractor to make some major repairs? How much time will you be able to put into your property? Also, make sure you’re able to fulfill your duties of being a landlord.
Step 2: Learn What Everything Means
When you enter any type of financial world, there is always financial terminology you’ll need to learn.
While looking to buy, you’ll see mention of usable versus rentable square feet. Usable square feet refers to the specific part of your property a single tenant will occupy–for example, a specific unit where they’ll operate their store. Rentable square feet refers to all space that a tenant and their customers may use on your property, including public restrooms and common meeting areas.
Vacancy rate is self-explanatory: it’s the percentage of units on your property that are currently vacant.
Ad Valorem refers to the tax you’ll be paying based on the value of your property.
When it comes to financing your property, you’ll need to know what Loan-to-Value (LTV) means as well. This is a ratio of how much loan you’re asking for versus the value of the property you want. Debt Service Coverage Ratio (DSCR) refers to how much income you’re bringing in versus how much debt you have. This tells lenders how much of your debt you’ll be able to pay off every year with your income.
At last, you’ll need to know what your capitalization rate is when it comes to making money. This number is found by dividing the income your property is making versus its total value, and can give you an idea on how much money you’ll make in the future. Cash on cash refers to how much money you’ve made over how much you invested, or put into, your property, and can include your down payment.
Step 3: Compare properties
Don’t settle on the first choice when it comes to buying your commercial real estate. Every property is different not just in size and value, but in location and possible tenants as well. You’ll want to find properties located near busy areas like city centers and universities. These properties attract the most businesses and therefore, produce more income.
Other things to consider are what you can use each property for, how much you’ll need to invest, its price, and its condition. Will repairs need to be made? What’s the future of the area you’re looking to buy in? What property taxes will you need to pay? What are its current tenants paying in rent every year?
Carefully calculate the cost versus the reward–that is, how much you’ll make from rent versus how much you’ll need to spend in loan payments, taxes, and insurance. This should be a positive number before you proceed.
Step 4: Enlist Help.
Buying commercial real estate is more complex than simply buying a home. You’ll need some assistance in figuring out how to manage your cash flow, how to secure the right financing, and how to navigate the laws surrounding commercial properties. This is where hiring a real estate lawyer who specializes in commercial properties comes in. You’ll also want to hire an accountant to guide you through the financial aspect of running your property as well as a mortgage broker to find the financing you’ll need.
Depending on the complexity of your property, you may also need to hire tax experts, additional lawyers, engineers, and other specialists.
Step 5: Get Some Financing
Unless you already have lots of cash on hand, you’ll want to look into getting a loan to purchase your property. Here’s where your mortgage broker can come in handy. Questions you can ask yourself are what financial institutions you can use, what kind of interest rate can you get, and what credit score will you need to get that interest rate?
Sometimes, traditional loans just don’t work out, but there are other options to get the property you want. Leasing a property is always an option if you’re looking to run your own business, but if you’re still looking to buy, you can also ask the seller for help. The seller may be able to look into seller carry back, which means the seller acts as the bank, providing you with financing. Your seller could even carry a second mortgage on the property, which you’d pay down every month.
Step 6: Consult With Your Lawyer and Make An Offer
So you’ve studied the area market and know what a good price point is for the property you want to purchase. You know exactly what you want and you’ve found a property that will generate decent cash flow. Now it’s time to make your offer.
Contracts can be complicated, so make sure you have your lawyer go over everything when you make an offer on a property. Your lawyer will go over the details of your contract with you so you understand your rights if something were to go awry down the road.
A letter of intent, which you’ll need to sign for your attorney, goes over the terms of your purchase. This letter won’t be binding, just in case there are issues with the contract later.
You’re finally ready to sign and buy your commercial real estate. There are a few more details to iron out, however.
Ordering an American Land Title Association survey of the property is a great idea and necessary in most cases. You’ll want to know everything you can about your property lines, secondary buildings, improvements that have been made, and easements, which are areas that utility companies have a right to access.
An escrow officer will need to watch your transaction and act as a neutral party. This person aids with transferring important paperwork like deeds and also assists with the transfer of funds. Final documents include the title affidavit, the bill of sale, warranties, supplier guarantees, a quitclaim deed, a non-foreign affidavit, and sale and assignment of contracts. This step ensures the protection of the seller and the buyer.
Once completed, you’ll now enter a due diligence period where you’ll have time to make sure all the documents are right. You’ll also have time to make sure everything you learned from the seller about your new property is accurate. If you find any issues, you can, during this period, tell the escrow officer to cancel the purchase.
Getting into commercial real estate investment can be a complex and daunting task, but by following the basic steps above, you can make your purchase in the North Alabama area as smooth as possible. Contact us today to get started.