Buy or Bye? 7 Key Considerations for Your Commercial Property Purchase

It’s not a coincidence that commercial real estate (CRE) is a common denominator of the richest families in the world. Only a few asset classes can rival its undisputable track record as a wealth generator and preserver.

Realty is almost always a good investment. However, you need vision, capital and skill to succeed. Consider these seven factors when buying a commercial property.

1. Motivation

Why do you want to venture into CRE? Industry observers predict the American market will grow from $25.37 trillion in 2024 to $28.18 trillion in 2028, so there’s enough money to go around. Investors want in for various reasons.

Aspiring landlords own multi-family rentals to generate cash flow. Corporations purchase an entire office building or warehouse to avoid being at the mercy of a property owner during lease negotiations. CRE players swap one type of investment property for another using a 1031 exchange to defer capital gains. Some investors want to gain a foothold in the commercial property market to diversify their portfolios, while others leverage property appreciation to hedge inflation.

The usual motivations for CRE purchases are:

• Land banking: You acquire large parcels of land that may be subject to development in the future and benefit from value appreciation.
• Development: You purchase and develop raw land, and construct structures for resale.
• Owner-occupied: You buy a property and personally manage it to collect rent or operate your business within it.
• BRRRR: You obtain and rehabilitate a dilapidated property, rent it out, refinance your loan and repeat the process.
• Fix and flip: You find and rehab a dilapidated property, and sell it at a profit.
• Wholesaling: You snag a property for a favorable price, enter a contract and transfer the contract to another buyer.
• Passive investing: You invest in CRE assets, which gives you less control in exchange for circumventing typical barriers, such as capital and experience.

Contemplate your investment goals to see whether CRE is an appropriate basket to put some of your eggs in.

2. Exit Strategy

Real estate is usually a long-term investment. It’s subject to downturns, as evidenced by the COVID-19 pandemic and its aftermath — office vacancies reached 18.2% in the second quarter of 2023.

Some CRE types may never rebound and yield handsome returns no matter how long you hold on to them. Regardless of how long you want to keep a piece of CRE in your portfolio, you must set realistic conditions to devise a solid exit plan with its tax implications in mind and keep it from backfiring.

Each investment time horizon carries various risks. Inflation and interest rate spikes can erode your gains. High vacancies can negatively impact your cash flow longer than expected, forcing you to take drastic measures to stay afloat.

3. Classification

There are three commercial building classes — A, B and C. Class A buildings are less than 10 years old, have the latest amenities, are in superb condition and command the highest prices. Class B buildings are aged 10–20 years, come with decent features and have fair visual appeal. Class C buildings are the oldest, have outdated facilities and usually need improvement.

Building classification is relative to location. A Class A suburban commercial property can fall into the Class B bucket compared to similar buildings in an urban area.

Some investors buy a lower-class building to renovate it so it graduates to the next classification. Others target the shiniest pieces of real estate to begin raking in profits with minimal improvement.

4. Growth Potential

Not all property types have rosy outlooks. However, risky bets in some areas can be promising in others. It’s all about context.

Explore CRE investment opportunities in various locations. Read industry reports to analyze hard numbers, and familiarize yourself with national, regional, state and local trends. Pay attention to existing competition to identify which markets are underserved and which are oversaturated. The savviest investors have a good nose for property bargains in places with unmet needs.

Don’t rule out jurisdictions and property types other investors wouldn’t touch. Replicating successful CRE ventures in neglected markets can be a sound investment strategy to maximize your returns if you recognize and calculate the risks.

5. Legality

CRE can present unique legal hurdles to investors. Your vision may be incompatible with zoning regulations and land use ordinances. Some properties may be subject to obscure laws that may catch you off guard — the Visual Artists Rights Act of 1990 (VARA) is an excellent case in point.

This federal law prohibits the destruction of visual art of recognized stature to protect the moral rights of visual artists. Such art can be a photograph, drawing, painting or sculpture art experts, the art community, or society in general views as possessing stature. Destroying qualifying art entitles the creator to seek actual or statutory damages of up to $150,000 for willful infringements. VARA rights are non-transferable, so they’re exercisable by all artists involved as long as they’re alive.

6. Financing

Leverage is a tried-and-true tool to create wealth in CRE. It’s a double-edged sword but presents a way to fund commercial property purchases with less risk than spending your resources.

Involving a lender operating in the space can help you assess your creditworthiness and your prospective investment’s risks. It’s in the lender’s best interests to steer you in the right direction and give you a reality check, ensuring you don’t bite off more than you can chew.

CRE investors’ most common financing options are hard money loans, conventional mortgages, bridge loans and SBA 504 loans. You can secure multiple lending options to pool the capital you need to close a CRE deal and realize your vision.

7. Domain Expertise

CRE is a people business, so surround yourself with competent professionals to help you navigate the purchase process:

• Hire a real estate agent specializing in the property types you fancy to access private listings.
• Use an attorney adept at commercial real estate to handle legal matters.
• Work with an experienced certified public accountant to prepare your financial statements, take care of your regulatory compliance requirements and assist you in tax planning.
• Find a mortgage broker to help you secure financing.
• Tap the services of qualified contractors to improve your property and bring it up to code.

Be a Wise CRE Buyer

Investing in CRE can be complicated, so don’t go through the process alone. Get as much expert assistance as possible to make informed decisions every step of the way.