In the wake of the worldwide commercial real estate slump, few properties are as expensive as they used to be. Some might even be considered "cheap" and thus a good opportunity to make money in the short- and longer-term. But even in hard times, investors looking for commercial property deals need to plan carefully and understand what they are getting into, because a bad property is no bargain even if it's cheap. Successful commercial property acquisition is both complicated and time-consuming and professional help is essential for inexperienced commercial property investors.
Define the Word "Cheap"
Understand what "cheap" means in a commercial real estate context. Commercial properties are assets whose value is closely linked to how much income they can be expected to produce, usually in the form of rents from tenants. A property is "cheap" only if its projected income stream will exceed by a significant margin the cost of acquiring it plus the cost of operating it.
Narrow Your Focus
Commercial real estate actually refers to several main types of property, all with widely different business models, including office, industrial, retail, hotels and apartment properties. No one, not even the most seasoned real estate pro, is an expert in every property type or even more than one or two.
Find a Good Broker and Lawyer
Establish relationships with the professionals whose help you will need to find and acquire cheap commercial property. A good commercial real estate broker will not only know his or her particular market in detail but also most of the potential sellers in the area. A skillful real estate lawyer will understand the ins and outs of structuring the deal.
Search for Properties
Look for properties on the market whose owners might have a reason to sell them at a discount. Inspect them carefully and try to determine why they are on the market. Some older property owners look to liquidate their assets as a form of estate planning. In other situations, owners are having a difficult time making payments on their loans and are willing to sell to cut their losses. Also, there is now a sizable number of foreclosed commercial properties coming on the market. Many of them will ultimately be sold at steep discounts by the lender who has taken possession of them.
Arrange Your Financing
It's quite difficult to borrow money to buy commercial real estate these days and to do so you must prove to a lender that the property you want to buy will provide enough income for you to keep current on the loan. In the case of buying foreclosed properties, you often will need cash to do the deal. That saves you the trouble of finding a lender but it also puts all of your equity at risk if the investment isn't as good as you thought.
Negotiate a Price
All pricing in commercial real estate is negotiable, except when the property is traded by auction. Do your math beforehand to determine how high you can reasonably go and still make money from the building once you are its owner.
Land has a tendency to increase in value as time goes by but, with certain exceptions, commercial buildings often lose value over the decades as they become obsolete. If you're buying property for your business, look into the possibility of a Small Business Administration-backed (SBA) loan. Building valuation is often expressed as a capitalization (cap) rate. Cap rate is the ratio of income to sales price (your capital investment).
- Land has a tendency to increase in value as time goes by but, with certain exceptions, commercial buildings often lose value over the decades as they become obsolete.
- If you're buying property for your business, look into the possibility of a Small Business Administration-backed (SBA) loan.
- Building valuation is often expressed as a capitalization (cap) rate. Cap rate is the ratio of income to sales price (your capital investment).
Dees Stribling has been a freelance writer based in Chicago for over five years and is a widely published real estate and business writer. He has edited magazines focusing on real estate, business and the fire service for over two decades. He holds a Bachelor of Arts in history from Vanderbilt University.