The process of buying commercial property is different from that of buying residential property. Understanding the difference between the two purchases is important if you intend to borrow funds for the same. Lenders have different policies for commercial real estate. For instance, you will pay a higher down payment for a unit of commercial property. The down payment for the same unit listed under residential property may be lower. Lenders consider the income from a commercial property when issuing funds for its purchase. Hence, you must consider the amount and consistency of cash flow from the property before taking further steps to purchase it. Here are some more tips on how to close the best deals in commercial real estate.
1. Establish Relationships
Most buyers require a mortgage to buy commercial properties. Given the high price of commercial units, you need to establish good relationships with potential lenders. Financial institutions have stringent measures and policies on issuing funds for commercial properties. The institutions know that occupancy of these properties changes all the time. Hence, they will ask you multiple questions about your diligence and ability to collect rent on time. They will investigate the flow of income from the property thoroughly and your debt repayment history. If you intend to buy commercial real estate in the future, start establishing relationships with lenders now.
2. Learn the Commercial Real Estate Jargon and Metrics
Before you contact any agent or direct sellers, learn all the language and metrics of commercial properties. Some of the metrics you must learn before initiating any deal or applying for a mortgage include cash on cash, cap rate, and net operating income. Potential lenders will use such metrics to determine the value of the property and estimate future income. The metrics will also help you to single out the best properties to invest in. You need to learn real estate jargon like 1031 exchange properties. The knowledge will be useful when you want to trade like-kind properties. Do not rely on your agent or facilitator to teach you the language. The information you need is readily available online and in print form.
3. Invest in a Professional Review
When you identify a commercial property that is worth your investment, the seller gives you some time to review it before closing the deal. During this time, you can rely on your knowledge to review the property or ask for professional help. Many investors make big mistakes when trying to save costs. Professional services are costly but worth it when considering commercial real estate. You need qualified appraisers, inspectors, and lawyers to review the property before you close the deal. Once the deal is done, you will have no option but to deal with all the issues with your new property. Use the grace period wisely and invest in the best professional help you can get in your area.
4. Talk to Other Investors
Investing in commercial real estate is a long-term venture that requires access to the right information. You can read every book and magazine on real estate to make the right decisions. However, sometimes the best source of information is another experienced investor. Do you have real estate investors in your network of friends? If not, you need to start connecting with other investors in the field. They will advise you on the best professional services to hire and share their experience. Hence, you can avoid making the same mistakes they made in their previous investments. As you build strong relationships with other investors, some may be willing to join efforts with you to buy high-priced properties. As you seek information and advice from your networks, ensure that you are also adding value to the relationships.
5. Buy from Motivated Sellers
Property owners sell their properties for different reasons. The reasons determine their willingness to negotiate for quick deals. One way to get the best deals in commercial real estate is to look for motivated sellers. Such sellers will be willing to close the best deal and move on to the next sale. Use the same strategy for 1031 exchange properties. As you look for willing sellers, you might find some who are willing to sell their property at a price below the market price. Pressing financial issues push property owners to settle for the best price they can get, even if it is below the real value of their property. The secret here is to do your homework well and stay updated of any new sellers that join the market.
6. Lock-in Financing before Buying the Property
We indicated earlier the need to establish good relationships with lenders as you look for commercial property. Here is another important tip to help you close good deals. Avoid bidding or closing any deal before you get a deal from a commercial lender. You need to be sure that you qualify for financing before bidding or buying. One reason for this approach is that the down payment for commercial real estate is high. If you are solely relying on a lender, you may not close the deal in time as required if you do not qualify for the loan. Talk to your lender and learn all lending terms you must meet to get financing.
7. Get Information
Your ability to make the right decisions in commercial real estate depends on the amount of information you get on the venture. Get all the information that other players have like the number of tenants in the property and those required to fill the rental space. Know how commercial properties are valued and the percentage required as a down payment. Estimate the income you will get from each property and identify factors that may affect income flow. Consider your current financial situation and the information you have to determine if the properties for sale are good deals or not.
Buying commercial real estate requires much more effort than buying other kinds of property. Commercial properties are more expensive than residential properties and other categories of real estate. You need all the information you can get so that you can make the right decisions. As you search for the best properties in your area, identify motivated sellers and involve certified professionals. Hiring professionals is an added cost, but it saves you from making huge losses on commercial properties. Connect and learn from other investors as well to avoid repeating their mistakes.