How to Buy Commercial Real Estate For the First Time
“Hey Peter, I want to get in to commercial real estate and buy a building, can you help me?” I hear this refrain often from colleagues, friends and family. The short answer would make for a BORING and not very helpful blog. “Yes, yes I can help you”. Blog over. Just kidding. Listen, while we CAN help you buy a commercial building I believe it is imperative for you to help yourself first! There are several steps to buying your first commercial space and many questions to be answered. While this may not be a “complete” guide it should get you started.
1. Learn some commercial real estate vocabulary.
ROI – Return on investment
NOI – Net Operating Income.
CAP Rate – Capitalization rate (One way to determine if the investment makes sense)
Cash on Cash Return – Annual income on investment over a year.
Ad Valorem – Basis for taxes
Rentable Square Feet versus Usable.
The list is endless but locate and learn the basics. You would not want to invest in something you do not understand. No need to go get a commercial real estate license … however, an educated buyer always makes better decisions. And I am assuming that you do want to sleep at night, correct?
2. Get Clear on Your Goals
What do you want? Simple question…leads to an awful confusing answer sometimes. In commercial real estate we work backwards. We work with the end in mind and then go out and assist you in accomplishing your goals. Are you wanting to lease it out? Are you looking to be an owner and have your office in the building? What is the plan with your accountant? Are you willing to be a landlord? Will the building numbers work in your proforma? Are you considering a partner? What is the exit strategy? What is your situation regarding cash? So many questions….but to be CLEAR in vision is most important.
3. Be Sure to Get Out and See the Market.
A well informed buyer always makes better choices. Get out and visit buildings similar to the one you are considering. Be sure to really understand the market. Once you do you are then able to analyze the numbers with better clarity. You can feel more comfortable in your decisions….remember that good night of sleep we were discussing?? Even in commercial real estate the old adage of Location, Location Location still stands. To be certain, it is still the most important ingredient in a good real estate decision.
4. Your Team.
Early in the process, possibly the very first thing to do is to assemble a great team. A team that works well together in a collaborative effort to defend your money. Yes, defend. There are a lot of moving parts and one can spend a lot of money on needless items throughout the process. And sometimes… sometimes it just makes good business sense to walk away from money spent in an effort to not spend more bad money. Your team should be able to help you. Who is on your your team? Your Lender. Your Broker. Your Accountant. These 3 hires are critical. Many people say that you make your money when you buy your property (in other words if you buy it correctly you later can sell for a profit), I would argue that you make your money when you hire the RIGHT people to help you.
Step #1. Find a great lender. One that has the heart of a teacher. One that will be brutally honest with you. One that is willing to speak to your accountant or financial advisor along the way if need be. So many people just hire a friend or someone that was recommended to them (by someone that has never done a commercial real estate deal) or just use their Big Bank that they keep a personal checking account at. DO NOT DO THIS. Ask around. Randomly call a few commercial real estate brokers and ask who they use. Ask your Broker for 2-3 names. Interview them. Have your financial advisor interview them. Your advisor may have someone. Take this seriously. It is important!
In commercial real estate you may not go straight to writing an offer after you found your dream location. You will likely write an LOI first. Wait….just wait. I know you want to know what that is. It is a Letter Of Intent. This letter is drafted typically by your Broker. It lays out only the Big Rocks….not the details. Price, timelines, commissions, deposits, etc…. When both parties agree to the LOI there is typically a 30 day window in which they will then work towards drafting a formal offer. This offer is likely going to be drafted by the attorney. This is the formal legally binding agreement. It will contain the details.
If you are ready to take on the process of buying commercial real estate….let’s chat. Call us today and let Kima Commercial at KW Commercial become your resource for all things commercial!
Go get em!