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. Having a purchasing commercial property checklist can be your best guild.
Proper due diligence is essential to making your commercial real estate transaction successful. You must have a purchasing commercial property checklist to make an appropriately informed decision.
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?
Recently, interest rates have been increasing. History has shown that they can fluctuate. In addition, lending policies have tightened up recently due to the general slowdown of the economy.
Talking to your bank about your borrowing limits for investing in commercial real estate is a good idea. For example, you might consider the following:
Do you need more than the equity available to fund this project? Do you want to increase or decrease your exposure by adding or subtracting additional loans? If so, will your financial position allow this?
Can you service your debt if we go through a period of high-interest rates or tenant vacancies?
Location of the Property.
As you’re not living there, the property area may not be so crucial. If you are purchasing the property for investment, you must have confidence in a constant pool of tenant demand. When using the property for your business, you must ensure it is conveniently located to serve your customers comfortably.
The location may affect rental profits if tenants prefer nicer areas with good schools, transportation, and local amenities.
Cities, towns, and areas are changing all the time. Changes in infrastructure, zoning, industries, and demographics can benefit one property type while harming another.
An example of this could be an aging population in the area. This may create a higher demand for retirement or medical property.
Another example is when you have more young families moving in. This may reflect the need for more preschool, childcare, and sporting facilities.
Be cautious when investing in an unfamiliar area, like another city or country, unless you’ve thoroughly researched it.
What factors can affect property location?
Many factors can affect property prices. For example,
major business closures. This would usually lead to fewer people in the area, so there would be less need for goods and services.
Or new major roads. As a result, passing traffic and customers would decline if that town was bypassed. On the other hand, a neighbouring area may see growth due to a bypass directing more traffic to their location.
Floods and droughts
New tourist attractions in the area can encourage more retail and accommodation.
Type of Commercial Property
The three main commercial property groups are retail, industrial, and commercial offices. 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 expected return 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 much without thorough research. Despite the temptation to go for higher returns, be very careful about getting into a property type you have not had experience in.
Management of the Property
We all want an investment property that is 100% passive. Looking after your property can take a lot of time and effort. Assess your willingness and capacity to manage the property’s upkeep. 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.
Qualities of a good commercial property management
Good property management requires trained staff with good communication skills and the ability to provide excellent service to clients.
Calculate the potential return on investment (ROI) based on different management scenarios. Should you hire a property management team? Should you hire your own property manager and staff? Should you get a manager to look for one aspect of the management, such as only maintenance or rent collection?
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. Consider what each investor is bringing to the table.
You should have a written legal agreement outlining the partnership terms, participation levels and exit strategies. Doing this correctly will save you unnecessary disagreements and legal costs.
The Adaptability of the Property.
Can rreal estate be used for other purposes in the future? Can it be refurbished, extended or developed to attract other higher-paying tenants? Eventually, what will you 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? Are there any zoning changes planned for the future?
Projects I have been involved with include converting industrial buildings to residential, motels to backpackers hostels, restaurants to corporate offices with retail components, and offices to boarding houses, to name a few.
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 when you decide.
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. A thorough building inspection 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 and maintenance requirements for things such as heating, cooling, air-conditioned systems, drainage pipes, etc.
Check for any historical problems with the building that could restrict its use and increase maintenance expenses.
What is the current zoning for the building, and what is the current development approval?
Do the current tenants occupying the area have the 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;
Until the mid-1990s, several buildings in the Sydney city fringe were mainly used for clothing, manufacturing, and wholesale clothing. I had a backpackers’ centre for sale over ten years ago. It was approved for use as a boarding house.
When the owners were asked if the approval was legal. They said the businesses had been running like this for over 20 years.
I then made inquiries with the local council on the current approval. They said they had been doing it for 20 years, but that didn’t mean they had permission now.
The businesses operating illegally for over 20 years needed recent development approval. This approval was necessary from their perspective.
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 the lease if the property is presently tenanted.
Is the rent consistent with the current market? Investigate any significant 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? Getting a statement from the vendor to ensure that payments are consistently paid on time would be an idea. 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. Several possible issues may arise. These include partnership disputes, the need to sell for financial reasons, health problems, unexpected maintenance cost increases, council orders, and more. This is all part of life and can happen at any time.
So, what should you look for when buying this 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. Investing in commercial property can be very complicated for a 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 in a business marketing plan.
This would include identifying future supply, demand, and cash flow as part of your marketing plan for your target market.
The plan should be as detailed as possible to prepare current and prospective owners for future challenges.
What do you need to cover in your commercial property plan?
Some of the items to include in your executive summary are as follows:
What is the investment strategy for the property or properties?
What are your branding and marketing ideas and policies?
How are you going to finance the project?
How is the property going to be managed, and by whom?
What are your long-term and short-term goals?
Do you have an exit strategy?
What are your company’s values and strengths?
What backup plans do you have if things don’t go as planned?
Have you got a solid plan for your property that can save you time and money when you need to sell it 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 email@example.com or the other contact information on this website for a free no-obligation confidential conversation.