Purchasing commercial property checklist
You intend to purchase a property as a commercial property investment or to run your own current business. What next? Owning commercial real estate can be very rewarding if you do your homework right. Proper due diligence is essential in making your commercial real estate transaction successful. To make an appropriately informed decision, you need to have a purchasing commercial property checklist.
Failure to do your due diligence properly can have legal and financial implications in the future.
Items to consider for your Purchasing Commercial Property Checklist should include:
Your current economic situation. What can you afford?
To begin with, how much money do you have as a cash down payment, and how much can you borrow? What amount of money can you afford to pay off a loan? Although interest rates have been relatively stable, they can fluctuate. In addition, lending policies have tightened up recently. As a result, it might be a good idea to speak to your banking institution to get a good idea of your lending limits for your commercial real estate investment. For example, you might consider the following:
Do you need more than what is available in equity to fund this project? Do you want to increase or decrease your exposure by adding/subtracting additional loans? If so, will your financial position allow this?
Location of the Property.
Because you’re not living there, the property area may not be so crucial. If the property is being purchased for investment, you need to be confident of a constant pool of tenant demand. On the other hand, planning to occupy the property for your business, you would need to be convinced you are conveniently located to service your customers comfortably. The location could also impact long-term rental profitability from tenants if they prefer areas that are more attractive due to better facilities in terms of schools, transport and local amenities, etc.
Type of Commercial Property
The three main commercial property groups are retail, industrial, and commercial office. In addition, there are other smaller groups such as hospitality, tourism, leisure, childcare, medical, retirement living and boarding houses. Which one will suit you depends on the return you’re expecting and the risk you are prepared to take. Some people feel more comfortable with a portfolio of one or two properties from one of the groups. Other people prefer it when they have several different types of properties within their portfolio to cover all areas. It is essential not to be seduced by a great deal at once.
Management of the Property
We all want an investment property that is 100% passive. Looking after your property can take a lot of your time and effort. In most cases, the higher the return, the more work the owner puts in. Excellent property management is required to maintain the property and ensure you maximise the performance and value of your investment.
Do you have the time, and are you prepared to do the work? This should be taken into account in looking at employing Property Management. Many owners find that the time invested in doing things such as gardening, painting, decorating etc., is far greater than they expected, which will ultimately affect their quality of life.
Good property management requires trained staff with good communication skills and the ability to provide excellent service to clients.
Buying Commercial Real Estate with Other Investors.
Many large commercial properties are purchased in syndicates. Are you prepared to work with other property partners? Purchasing property with other people can help you buy a higher-priced property. In addition, what skills or cost savings do they bring to the deal? It would be best if you still had financing and due diligence on your end; however, working together will save time, reduce costs and increase your odds of closing successfully. If you’re buying multiple commercial properties with others, you want someone who knows how to find these deals and get them closed.
The Adaptability of the Property.
Can real estate be used for other purposes in the future? Can it be refurbished, extended or developed to attract other higher-paying tenants in the future? Eventually, what are you going to do if the current level of available tenants slows down? Think about expansion and growth potential: What is the local economy doing now that will affect how much rent will be charged and your ability for your tenants to pay more rent? How might this change over time? Is there any room left over locally for new development?
Look at Other Opportunities.
Keep an open mind and consider other commercial property investment opportunities. Get an idea of what else is available in the marketplace. There may be other properties better suited to your skills and knowledge. Research all options and keep a list of potential alternative investments on hand for when you’re ready to make a decision.
Financing your Commercial Investment
First, most investors need some finance for the real estate transaction. Traditional methods of funding may not suit your situation. Besides the central banks, what are the other financing options available to you for the equity you have? You may need to explore more creative financing to purchase your property. Over the years, we have worked with many vendors and buyers to get deals over the line. Besides vendor financing and second mortgages, we have also negotiated a lease-to-buy options.
Age of the Commercial Building
Buying an older building can get you a higher return. At the same time, it can be more time consuming and have higher maintenance costs. Having a thorough building inspection carried out before your purchase can uncover any hidden surprises in the future. Although difficult to assess, you should factor in unexpected maintenance costs in the future. When buying an old building, make sure that you look at ‘the numbers’. In most cases, there will be repair & maintenance requirements for things such as heating/cooling/air-conditioned systems, drainage pipes etc.
What is the current zoning for the building, and what is the current development approval?
Do the current tenants occupying the area have correct building approval? Are there approved plans for the claimed approval? Many property owners assume that the current tenant has development approval. Two examples that I can give over the years are as follows;
Up to the mid-1990s several buildings in the Sydney city fringe were mainly used for clothing, manufacturing, and wholesale clothing. In another example, I had a backpackers’ centre for sale more than 10 years ago, that had current approval for a boarding house. When I questioned both owners on the legality of the approval, they replied that these businesses had been running this way for more than 20 years.
I then made enquiries with the local council on the current approval. Their simple reply that just because they had been operating this way for more than 20 years did not mean they had current permission. As far as they were concerned, the businesses we’ve been working on illegally for more than 20 decades. Consequently they needed current development approval to operate.
Commercial Real Estate Lawyer
In summary, commercial property transactions can be complicated with many legal issues to consider. Working closely with an experienced commercial real estate attorney familiar with all the complexities of these transactions and property law can save you much time in addition to the right legal advice in any future commercial real estate dispute resolution in the future. This will also ensure that your interests are protected and kept up to date at every step of the process.
Is the property currently tenanted?
Consider the current length of lease if the property is presently tenanted.
Is the rent consistent with the current market? Investigate any large variances in rent as you may have a problem keeping an above-market rental when it is time to renew.
How stable is the tenancy? Is the rent paid on time? It would be an idea to get a statement from the vendor to ensure that payments are consistantly paid on time. In addition, how easy is it to find new tenants at a similar rental if the current tenants decide to leave?
What’s the landlord doing to maintain the property and improve its condition?
How well does the landlord manage the property? Do they maintain existing fixtures, appliances, carpets and flooring? Are there any major repairs that would require your attention?
How long do you intend to keep the building?
I have seen many property investors buy an investment without any detailed planning. In most cases, buyers are usually thinking long-term. In short, they typically don’t factor in problems that may occur in the future. These problems could be partnership disputes, needing to sell to free up cash, unexpected escalation of maintenance costs, council orders etc. This is all a part of life and can happen at any time.
So what should you look for when buying this type of investment property? It would be best to consider your goals for maintaining it or selling it within that projected period.
Why do you need a commercial real estate investment business plan?
Market conditions change all the time. As such, investing in commercial property can be very complicated for the real estate investor. They are rarely treated as a short-term type of real estate investment.
Commercial property investment should be treated like a business. Writing commercial real estate industry business plans should include essential items included in a business marketing plan.
This would include items such as identifying future supply and demand and cash flow as part of your marketing plan for your target market.
The plan should be as detailed as possible to prepare for future challenges for current and prospective owners. Some of the items to include in your executive summary are as follows;
What is the investment strategy for the property/properties?
What are your branding and marketing ideas/policies?
How are you going to finance the project?
How is the property going to be managed, and by whom?
What are your long and short-term goals?
Do you have an exit strategy?
What are your company values and strengths?
What backup plans do you have if things don’t go as planned in the future?
In summary, having a good business plan for the property can save you a lot of time and money if you need to sell quickly.
Have you got the right real estate agent working with you on your Purchasing Commercial Property Checklist?
As a final point, having an experienced commercial real estate agent can save you a lot of time. They have gone through this process many times before and can assist you with your purchasing commercial property checklist. More importantly, it will ensure you can achieve the highest possible result in the current market for you.
Like to discuss this further? We would love to help you. Feel free to contact Con Tastzidis via Phone on 02 9882 2221 or email invest@cstproperties.com or the other contact information on this website for a free no-obligation confidential conversation.
