Buying commercial property for investment can help you build wealth. When you invest in commercial real estate, you can earn higher returns, have another source of cash flow and get tax benefits, like deferring capital gains.
As with many of life’s choices, investing in commercial property has risks and rewards. As a first-time investor, you want to do all you can so your first deal goes well, and you avoid risks down the line.
Before you dip your toes into the CRE investment waters, educate yourself about the types of commercial properties and explore current market trends. You should also research how a typical commercial real estate deal takes place.
Need a starting point? We compiled the top commercial property investment tips from our experts at Commercial One Brokers in Branson, MO. Dive in for our advice on how to get into commercial real estate for new investors.
Jump to:
- Why are you investing?
- Types of commercial real estate
- Prepare your financials
- Avoid lowball offers
- Hire a property manager
- Work with a commercial broker
1. Define Why You’re Investing
It may seem silly, but your “why” is essential. Why are you investing? Why commercial real estate? Why now?
You need to know what your end goal is. What do you hope to accomplish by investing in commercial real estate? Once you know your “why,” you can determine what type of properties will help you get there.
Are you investing to shelter income and maximize tax benefits? Are you primarily interested in additional cash flow? Do you have a longer-term investment horizon and want “free and clear” properties at retirement? Do you wish to build wealth for your heirs?
As you build and diversify your CRE portfolio, remember your initial reason for investing and let it guide your decisions. It will give you direction and help you avoid investment options that don’t fit.
2. Learn About Types of CRE
Buying commercial real estate is different than buying a residential home. You can buy and sell quickly or lease to a business for profit. First-time CRE investors should learn about the types of commercial real estate.
When you’re just getting started, invest in what interests you and what matches your “why.”
What Are Some Commercial Property Types?
Office
The condition of an office space affects the types of tenants you’ll attract. Offices are categorized by “classes.” Each class reflects the age and state of the property.
- Class A properties are premier spaces with higher rents and new finishes. Tenants that must impress clients and customers will look for Class A spaces.
- Class B office spaces fall in the middle range of conditions. They are older buildings that, while aging, are still in fair condition. These spaces have fewer amenities than Class A properties.
- Class C office buildings are best when function is your primary need—like startup businesses. These spaces are over 20 years old and may be in less desirable areas.
Depending on the area, office buildings may center around a business district or a prominent part of the city. In big cities, office spaces tend to go up with skyscrapers.
Larger companies may opt for a suburban location instead, where they can build or occupy several buildings and maintain unique amenities like private parking lots or gardens.
Another thing to consider with office tenants: Are these companies requiring their work force to return to the office, or will they work remotely? They may use their office space differently than in the past.
Retail & Restaurant
You’ll lease to businesses that sell goods or services. Think shopping centers and malls. Retail properties and restaurants are often highly visible to bring in traffic.
The local economy and customer demographics are big considerations when buying and leasing retail properties.
- Neighborhood centers include grocery stores, drug stores and other retailers.
- Shopping centers offer many goods and services, including clothing, food, electronics and home decor.
- Power centers have large anchor tenants: national brands, home improvement stores or warehouse club stores. Power centers can be 250,000 to 600,000 square feet, and restaurants, fast-food options and banks often pad them.
- Community retail centers are smaller than power centers. They are home to various tenants and feature convenience items or general goods.
- Mixed-use properties include a blend of spaces. Retail is often on the ground floor, while office or living quarters make up the remainder of the building.
Industrial
Warehouses, factories, and distribution centers fall under the category of industrial property. These properties are outfitted to meet the needs of manufacturing plants or logistics centers.
- Light assembly spaces might be distribution centers or used as company storage space.
- Flex warehouses have features of both an office and a warehouse. In these spaces, tenants can store or assemble goods and display products to customers or bring customers in for services.
- Bulk warehouses are large spaces used as distribution hubs for national companies.
Tip: Start With One Type
Our advice? As a beginning investor, you should zero in on one type of commercial real estate at a time.
Choose the property type that interests you. Learn about how the businesses using your properties operate. Once you’ve learned what you can, you can start investing in other property types.
3. Prep Financials & Business Plan
Before talking to a property owner, you should know your budget and have your financial plan ready. Determining how you will pay for the property first shows you are serious. Will you take out a commercial real estate loan? Will you pay in cash up front? Have a plan and decide what your limits are.
Applying for financing first saves you time. It also sweetens the deal for the seller. If you get pre-approved for financing, you can show the property owner that you mean business and have already secured the means to back your offer. That tells the seller that you can close the deal quickly.
It is beneficial to have a good CPA who knows your financial situation and can help guide you with what you can accomplish.
During the loan underwriting process, lenders will analyze your cash flow statements, credit history and net worth before approving you for financing. Be sure to have the necessary documents and statements available.
You won’t get approved without a business plan! Lenders need to feel confident that you have a plan in place to pay back the loan. Think through how you will use the property and project your return on the investment. Share your business plan with the lender.
4. Don’t Make Lowball Offers
You can’t always get everything you want. The seller has to profit or find benefit in the transaction, too! Don’t show off your inexperience—or insult the opposite party—with a lowball offer.
New investors often make offers that are too low when combined with their terms for the deal. When you propose an offer, remember that you can have one of two options:
- Buy at your price with their terms OR
- Buy at their price with your terms.
Do your research on market prices for similar properties. Then, be ready to compromise. You may have to give a little up if you’re asking for specifics and want a certain price. It’s a negotiation, after all.
Remember, net operating income (NOI) will play a key part in determining the value of the property. It will also dictate the financing terms and conditions from your lender.
5. Hire a Property Manager
Managing tenants can be a full-time job. If you plan to lease the property you buy, you need someone to take care of the day-to-day.
Hiring a property management company takes the burden off of you. You’ll focus on your day job or building your portfolio while the management team ensures everything with your property runs smoothly.
A property management team offers many services. They’ll act on your behalf to maintain the property and respond to tenant emergencies. Property managers handle tenant communications, collect rents, hire maintenance professionals, and solve problems that arise.
If the property is smaller, you may need to manage it yourself for a time while you build your portfolio. The downside to self-management is that it’s hard to give your tenants bad news. Owner/managers tend to get talked into lower rents, and they aren’t as forceful with collections. Many may agree to fix items on the properties that should be the tenants’ responsibilities.
Commercial One Brokers’ sister company, Maple Properties Of Branson, offers property management services. We’ll take care of your commercial property 100% or on an on-call basis. Whatever you need, we’re here to help!
6. Work With a CRE Broker
We all get by with a little help from our friends. Why not do more than get by with help from a commercial real estate broker? Be confident when you invest in commercial real estate with an experienced professional by your side.
Of our commercial property investment tips, this one is the biggest! When you work with a broker, you unlock a wealth of market knowledge and experience. You’ll find a commercial property that suits your goals and budget—and you won’t have to do it alone.
Brokers help you find property, negotiate with the seller, obtain financing and understand the risks and benefits of commercial real estate.
Are you ready to start looking? Let’s get you your first investment property.
Talk to our team at Commercial One Brokers. We help you find investment commercial property for sale in the Branson, MO area.
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Article written by Steve Critchfield, CCIM, of Commercial One Brokers. Steve has more than 36 years of experience in commercial and investment real estate. He is active in many Branson, MO organizations, including The Branson Lakes Chamber & CVB, The Tri-Lakes Board of REALTORS and the Taney County Partnership, to name a few.
Find Steve on LinkedIn.
