By Emeka Anaba.
Whether you want to diversify your investments or you need a building for your business, buying commercial property can be a wise financial move. It’s not as easy as purchasing a house, though.
Closing dates and loan criteria vary for commercial properties. Furthermore, even though real estate is known for consistently increasing in value, investing in it carries some risk.
The phrase “commercial real estate” is broad and encompasses the following:
Retail space; factories and warehouses; multi-family residential structures; office buildings; hotels and restaurants; campgrounds, golf courses, and other outdoor leisure areas
Residential properties with one to four units are typically classified as single-family by lenders, while those with five or more units are classified as multi-family
REASONS TO INVEST IN REAL ESTATE
Savvy investors know diversification is a cornerstone of wealth-building. Spreading money across a variety of assets means there is less risk of losses should one type of investment do poorly. Real estate has a proven record of returns, and investors may also use it as an inflation hedge and for its tax advantages. “Some people buy for cash flow and some buy for appreciation,” says Nelya Calev, a real estate broker with John L. Scott Real Estate in Bellevue, Washington. Those interested in cash flow purchase property with the expectation of receiving a steady stream of income from rent payments or other revenue. Those who buy with appreciation in mind want to add to their portfolio property that will add value in future.
Although purchasing commercial real estate can be a difficult process, online platforms are opening up new opportunities for investors. Here are three typical methods for purchasing business real estate.
1. Invest in Real Estate
You may submit an offer to buy a piece of commercial real estate, but if you don’t already have a profitable company, it might be hard to get financing. Banks are expected to carefully review applications and demand a larger down payment for loans related to commercial real estate. It’s common to be required to submit your business plan and CV with your loan application. If you’re new to commercial property, experts advise investors to consider starting out with a one- to four-unit residential property. Since these are treated as single-family properties by lenders, it can be easier to receive a mortgage for their purchase. Once you have experience purchasing and managing several smaller residential properties, banks may be more likely to approve loans for larger properties.
2. Find a Partner
Another strategy for getting started in commercial real estate is to find an experienced business partner. Consider being a silent partner if you have no interest in managing projects. The responsibility of silent partners may be restricted to the amount of their investment, and they are not involved in management decisions.
Finding a mate can be facilitated by friends, family, and business contacts. You might also look for local investing clubs or real estate investors. Aside from providing an excellent opportunity for networking with fellow investors, the majority also provide instructional materials to aid in members’ success.
Regardless of how you locate a business partner, make sure to thoroughly investigate them before doing business with them.
3. Make a Real Estate Syndication Investment
Syndicating real estate allows you to buy commercial real estate with a group of investors. All of the practical components of the transaction, such as selecting a property, negotiating its sale, and working with a property management business, fall within the purview of a syndicator or sponsor. In return for ownership shares in the property, investors give money.
The syndicator may collect significant fees and bonuses early in an agreement, whereas investors may not get paid until later. But for someone looking for a hassle-free method to acquire commercial real estate, it might be a fantastic choice.
BENEFITS OF OWNING COMMERCIAL REAL ESTATE
Equity: Since real estate typically appreciates in value, you can expect property to build equity over time. That equity can be converted to cash by selling the property, or leveraged to finance other investments or business purchases.
Passive income: Depending on the property, commercial real estate can provide steady income in the form of rent payments from tenants. Even owners who buy property for their own business’s use might be able to earn passive income if they are able to lease out a portion of their space to another company.
Diversification: Real estate may perform well at times when other investments falter. And even if the value of real estate were to decline, they may still provide reliable passive income from renters.
THE DRAWBACKS OF PURCHASING COMMERCIAL PROPERTY
One must carefully consider the advantages of buying commercial real estate versus any potential disadvantages.
• Obstacles to entrance: Commercial real estate loans are typically handled by banks similarly to business loans, meaning that only applicants with strong financial backing, revenues, and business plans will probably be granted approval. It’s possible that certain banks will demand a down payment of up to 40% on business properties.
• Liquidity: Although real estate is an asset of great value, it is not easily convertible into cash when needed. Rather, the search for a buyer will be necessary, and the closing process may take many months. The closing process may take a few or several months.
• Additional expenses: Taxes and upkeep are a part of owning any form of property. Furthermore, after a sale, investors should anticipate that a property would stabilize and start to generate consistent revenue after a period of 12 to 18 months.
Tax benefits like depreciation deductions may be able to offset some of these drawbacks. Rather than purchasing a single property altogether, others may be handled by employing real estate syndication. However, until you get down and crunch the facts on your anticipated costs and return on investment, you won’t know for sure. Put together a team of experts to help you before and after the purchase to make sure you make the right choice. At the very least, these people have to consist of a qualified property manager, real estate broker, lawyer, accountant, or financial planner.
4 comments
Alexander Rees
We went down the lane, by the body of the man in black, sodden now from the overnight hail, and broke into the woods at the foot of the hill.
Ralph Davin
On our side the fire had done no more than scorch the nearer trees; it had failed to secure its footing. In one place the woodmen had been at work on Saturday; trees, felled and freshly trimmed, lay in a clearing, with heaps of sawdust by the sawing-machine and its engine.
Alexander Rees
We went down the lane, by the body of the man in blac, sodden now from the overnight hail, and broke into the woods at the foot of the hill.
Ralph Davin
On our side the fire had done no more than scorch the nearer trees; itt had failed to secure its footing. In one place the woodmen had been at work on Saturday; trees, felled and freshly trimmed, lay in a clearing, with heaps of sawdust by the sawing-machine and its engine.