Whether you are looking for a space for a new, start-up business, or you are a seasoned commercial real estate investor, the old adage “Know Before You Go” still applies.
When you’re just starting out, however, the process of identifying a great property can be overwhelming.
This guide will help you understand the process of finding a property that (1) works with your investment portfolio, (2) is located near your target audience (or within a short drive/commute to your audience, and (3) will be a profitable move for your business
1. ESTABLISH YOUR NEEDS
Depending on your business model, you may want to lease or purchase your building.
Here are a few things to consider.
- Determine the type of space you’ll need.
Are you looking at industrial/warehouse? Laboratory? Retail? Office? Multi-use?
- Whether leasing or buying, how much space do you need to be profitable?
It is easy to underestimate (or overestimate) your needs and put yourself in an unfortunate spot only a short time later. You could have limited space, making expansion impossible or very difficult, or you could have too much space – adding extra overhead costs and stress.
In the retail industry, Bill Beckeman, author at LinearRetail.com advises creating a store layout and then comparing your square footage estimates to average square footage used for common retail chains, to help you better imagine the use of space.
- Do you expect this space to be temporary or more permanent?
Many businesses outgrow their space within the first few years.
- What is your budget?
Can you afford a space on your own for your needs? If you require larger space, are you willing to consider investing in the purchase of a building with a partner?Lynne Meredith Schreiber of StartupNation.com says this,
“Is buying for you? Don’t even consider buying a building unless it’s a great real estate investment separate from your business, or unless you have cash to burn. Give your business some time to grow before taking that step, as real estate woes can muddy your business focus.”
- Will you be open to a property that need repairs? Upfitting?If not, you’ll want to look for turnkey properties.
Enough Space To Be Profitable
Make sure you plan accordingly and have enough space for any business inventory and growth potential (adding offices, etc.)
2. LEARN THE LINGO
Understanding commonly used real estate terms will help you have clarity in discussions with your realtor, lawyer, and others.
Want an in-depth vocabulary guide? Check out this printable PDF written by the Commercial Real Estate Investment Association.
3. UNDERSTAND KEY METRICS
This sort of dovetails into the “Learn The Lingo” point, but knowing these key metrics can make a huge difference in your approach.
Investopedia identifies three key metrics to know and use in your decision-making process.
- Net Operating Income – You want positive NOI.
- Cap Rate – For income producing properties, like apartments, this helps you calculate value.
- Cash On Cash – Mashvisor gives the formula here:
“Cash on Cash Return = net operating income/total cash investment”
4. ASSESS YOUR RISK
In his guide to safer investing, Scott Clayton at TSI Daily Wealth Advice says, “Instead, they (successful investors) try to arrange their portfolios so that they profit more or less automatically over long periods.” Scott advises spreading out your investments to reduce risk i.e. don’t put all your eggs in one basket.
If you decide to move forward with a property purchase, knowing your risks, will help you make an educated decision.
David Scherer of Origin Investments lists “8 Types of Risk Every Real Estate Investor Should Know About” in his article.
Risk factors include:
- General Market Risk – Diversification of portfolio based on general market conditions
- Asset-Level Risk – Identifying the risk class for the building you are looking to purchase
- Idiosyncratic Risk – Property-specific risk, like the downtime needed for upfits/renovations
- Liquidity Risk – How quickly (or slowly) the property could sell in the given market
- Credit Risk – The value associated with the property’s income stream
- Replacement Cost Risk – The cost to replace the property at the same or equal value
- Structural Risk – The risks that come with the financial structure of the investment
- Leverage Risk – Making sure that the return on investment matches the amount of risk with investing in the property. The more risk, the more leverage the investor should have.
As a note, leasing a property also includes risks, as well, like replacement cost risk. If your landlord deems the property lease amount should be raised, and you cannot afford the lease cost, you have to find another suitable building with the same traffic, within distance to your audience or market.
An Amazing Space
Until the landlord increases the rent…
5. BRING IN THE EXPERTS
With a clear vision of your needs and a rough budget in mind, you’ll want to bring in the experts to help you realize your dream.
- Data Analyst – This person may be hired by you directly, or hired by your commercial real estate broker. This person provides data to help you identify:
- Retail/Service Industry (B2C): Where populations of your target customers live
- By knowing where your target customers live, you can make sure your business is located in an area accessible to them.
- Competition within that area (B2B or B2C)
- Traffic patterns – helpful if you plan on utilizing drive-by or pedestrian traffic sources
- Percent of industry business success within that area (as compared to national standards)
- Retail/Service Industry (B2C): Where populations of your target customers live
- Commercial Realtor – This person will use the data from the Data Analyst, as well as your budget, needs and desires, to help you locate properties that will best serve your business. This person may also have connections to potential real estate investment partners, if you are open to finding a partner to help you purchase a larger property.
- Mortgage Broker – Unless you are planning on paying for your property in cash (or leasing a building) a Mortgage Broker will help you find the best loans to help you afford your property purchase.
- Commercial Real Estate Lawyer – This person will help you make tidy up any legal ends on before you make your offer and finalize the details and contracts in the final stages of the transaction.
- Other experts you may need include: accountants, tax experts, notaries, appraisers, and environmental specialists. Source
6. EVALUATE THE DATA
You should have enough data from your Data Analyst or Realtor to begin “shopping” for properties. You’ll “online shop” commercial listings, between 10-20, in locations that you desire, to get an idea for the real estate prices in that area for that size building.
You’ll need to get a baseline price in mind that covers the building that you need to be profitable + any repairs/upfits + located in a trafficked area close to your target customer base (if offering locally based B2B or B2C services).
If purchasing a property, with this price range in mind, it’s time to find out the what options are available to you. If leasing a property, move on to Step 6.
7. REVIEW FINANCING OPTIONS
Now is the time to speak to your Mortgage Broker or Loan Officer.
Depending on your business model and type, you can review:
- SBA 504 Loans for Commercial Real Estate and Heavy Equipment – 10% Down Payment
- Conventional Loan – 20-30% Down Payment
Review your financing options with your Mortgage Broker, get pre-qualified, and get back in touch with your realtor.
8. VISIT PLAUSIBLE PROPERTIES
With pre-approval for financing (if needed) in hand and data from your analyst that tells you the best locations for your business to help position your business for success, you’re ready to call on your Commercial Realtor.
Your realtor can provide you with a list of properties that meet your financing requirements and your business needs within the locations you are considering.
When visiting a potential property, have a critical eye. In an article on Biz2Credit, author Megan Zhang recommends “having the eye of a landowner”.
“When analyzing properties, you should adopt the critical eye of a landowner. Are you looking at a great deal or a money pit?”
You’ll want to make a list of repairs or upfits that may be needed to get quotes on these repairs from contractors later.
Making this list can also help your realtor negotiate the price down for you when making an offer.
9. GET RENOVATION QUOTES
If you are open to a property that made need renovations, here are a few tips when using contractors:
- Get no less than 3 quotes from contractors for the upfits you’ll need before moving in.
- Take the average time quoted by the contractors (if 3 contractors quote 2 months, 1.5 months, and 3 months, take the average of 2.15 months), then multiply by 2.5.
- There are ALWAYS hiccups in renovations. Expect the renovation to take between 2 – 3 times longer than quoted. If the job is completed before that time, you’ll reap the benefits of having a workable space before time, under budget.
10. ADDITIONAL HOMEWORK
Other agencies you may want to resource and ask include City or County Codes offices. You will want to know if there are any up and coming renovations to that area that may require additional spend on your part to meet zoning laws and regulations.
You’ll also want to:
- See when the property last sold (Deeds Office) and how much it sold for.
- Find out why the owner is interested in selling it now.
- Talk to the neighbors. Is there anything you can learn from neighboring businesses that will help you make an educated offer.
11. LAWYER UP AND MAKE AN OFFER
Check in with your lawyer before you make an offer. Your lawyer will create a letter of intent for you to review and sign.
This protects you in the event that anything goes sideways later, during the contract phase.
12. TIDYING UP LOOSE ENDS
Your Realtor should handle this process for you. This is the “Due Diligence” portion of the process. Here, you’ll learn everything you can about the property you’re about to go into debt for.
- A survey will be ordered to finalize and review property boundary lines
- Title Search
- Identification of easements
- Location of additional businesses included with the property
- Zoning and codes compliance issues
- ADA Compliance
When looking to make a sound business property purchase investment, it’s important to have a team of experts ready to make your investment go the distance.
If you’re ready to get moving, give us a call.
Our real estate office has successfully handled over 200 commercial real estate transactions. We’re happy to work with your team, but if you are just getting started, we can also refer you to some of the best commercial property experts in the business.
Ready to discuss your needs? Reach out to us here and we’ll schedule a time to review your needs and help you create your personalized commercial real estate purchase success checklist.