The real estate market is increasingly and deservedly attractive, not only for personal real estate but also for commercial properties. This makes sense; commercial real estate is a lucrative and exciting investment opportunity. However, the journey to acquiring your first commercial property may seem complex, if not intimidating. But have no fear; below, we demystify the process, empowering you with the necessary knowledge to kickstart your retail real estate investment adventure. Read on.
Understanding the commercial real estate (CRE) market
Before diving into the multidimensional world of commercial real estate, it is vital to grasp the basics. Renters lease commercial real estate spaces for business purposes. CRE encompasses offices, retail areas, industrial buildings, and multifamily residential properties with five or more units. Each type of commercial property possesses unique pluses and minuses and adheres to different market trends and leasing structures. To delve deeper, commercial real estate usually includes:
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Office Buildings: these span from modest professional buildings to enormous skyscrapers in the city center and are classified as A, B, or C based on location, construction quality, and amenities.
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Retail/Restaurants: both structures house retail shops and restaurants, ranging from individual stores to part of a more significant shopping center or superstructure, such as an airport.
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Industrial: think warehouses, manufacturing buildings, distribution centers, and more, properties tending to be located on the outskirts of cities and varying significantly in size.
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Multifamily Units: any residential property, including four or more units, is considered commercial. Commercial properties include apartments, condominiums, and multifamily estates, such as a large mansion split into at least four sub-units.
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Particular Purpose: units designed for singular business use, like hotels, hospitals, schools, and storage facilities.
Each variety of commercial real estate involves its potential benefits and challenges. For instance, office buildings provide stable income but can be vulnerable to economic downturns (such as Covid). On the other hand, consumer spending habits greatly influence retail real estate, while industrial real estate depends mainly on trends in manufacturing and logistics. Multifamily properties offer more stability due to the constant demand for housing.
The difference between standard and triple net leases
In multifamily properties and in most residential leases, the only costs passed through to the tenant are rent and utilities. However, a nuance of commercial real estate is something that’s referred to as NNN. The triple net lease passes through the weight of maintenance, property taxes, and building insurance. This usually takes the form of an additional charge on top of the base rent. This also varies slightly from CAM charges, which stands for Common Area Maintenance. CAM charges are included as part of NNN, but some buildings only charge for maintenance, whereas some also include insurance and taxes in the deal.
Determine your investment goals
What are your long-term goals for this investment? Are you interested in rental income, property appreciation, or a combination? Ultimately, establishing your investment goals upfront will guide your strategy and aid in selecting the correct type of property to meet your objectives. Like any investment, buying commercial real estate should be motivated by clear, well-articulated aspirations. Refine your investment goals according to the following metrics.
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Financial targets: cement what you want your return on investment (ROI) to be. Are you more interested in immediate cash flow or long-term capital appreciation?
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Risk tolerance: all investments entail some degree of risk. Evaluate and cement your risk tolerance early and prioritize properties that align with your comfort level.
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Level of involvement: determine how much you want to be involved in property management. If you prefer a hands-off approach, consider a triple-net lease where the tenant handles maintenance, insurance, and taxes.
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Time horizon: it is crucial to determine whether this is a short-term or a long-term investment. Your timeline will hugely dictate the types of properties you should consider.
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Market conditions: your investment goals should collaborate with current market conditions. For example, if the market is saturated with retail spaces, now might be the time to invest in another type of commercial real estate.
Pronounced investment objectives help you focus your real estate search and make decisions that reflect your more comprehensive and overarching financial plans. Commercial real estate is not a one-size-fits-all investment. Your goals should mirror your circumstances, personality, professional life, and longer-term projects.
Securing financing
You probably already know that investing in commercial real estate often entails substantial capital. Therefore, it is essential to have your finances in order before you embark. Various financing sources are available, including banks, private lenders, and Real Estate Investment Trusts (REITs), each with its requirements, interest rates, and repayment terms. Undertake thorough research to select the best option.
A quality team
Acquiring a commercial property is not a solo endeavor. It involves recruiting seasoned professionals to steward this complex process, including commercial real estate brokers, attorneys, accountants, and commercial property inspectors. These professionals will help you circumnavigate common pitfalls and ensure a smooth transaction.
Find the ideal property
Having established your goals and assembled your team, it is time to hunt for the perfect property. A high-quality commercial real estate agent will prove invaluable, connecting you with properties that align with your investment goals, budget, and risk tolerance.
Due diligence
This is arguably the most crucial stage of buying commercial property and entails:
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Reviewing all available information about a property, including verifying the title.
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Appraising the property.
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Inspecting the building.
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Reviewing leases and financial records.
This juncture of the process allows you to identify future challenges that could impact the value and profitability of your investment.
Seal the deal
Having undertaken the above steps and being satisfied with your prospective investment, you can move to finalizing the transaction. A real estate attorney will help you through this process, ensuring all contracts are properly executed and you understand your obligations.
Like any significant investment, purchasing commercial real estate entails inherent risks. But your chances of prevailing significantly increase with the proper knowledge, an excellent team, and the willingness to dedicate sufficient time and effort.
Partnering with a top-quality real estate agent
Venturing into the commercial real estate market need not be intimidating, and working with a high-quality real estate professional ensures it won't be — an agent like Marc Bryman. Marc's years of experience and formidable understanding of the Bay Area, California, commercial real estate market over qualify him to find your dream commercial property.
Thanks to his extensive network within the industry, Marc will connect you with properties that reflect your unique investment. By partnering with Marc, you gain a skilled negotiator and trusted advisor to steer you through every stage of your commercial real estate investment process. Contact Marc today.
*Header photo courtesy of Marc Bryman
