Buying and owning commercial real estate does not make sense for every business and can be a complicated process if you don’t know what you are doing. Below are a few questions to consider and steps that will help get you started.
1. Get to Know Your Situation Before Buying a Commercial Property
- Is your company in growth mode or more stabilized?
- How many employees do you have now and do you plan on having 2, 3, 5 years from now?
- What kind of commercial property do you want to purchase?
- Are you wanting to buy this to owner occupy for your business or for investment purposes and rent out?
- What is your ideal location?
- Do you really have to buy or could you lease the property?
- What is your cash & financing situation? Are you able to make a significant down payment?
- Are you open to partnering up with anyone else to buy the property?
- Are you able to tolerate risk?
- How much time do you have to manage the property?
- What knowledge do you currently have about managing commercial properties, contractors, and other experts?
- Are you planning on hiring a property manager or managing it yourself?
- Are you willing to be a landlord if needed?
- Are you ready to make a significant purchase like this?
- What if you outgrow the space too soon?
- Can you really afford it?
2. Commercial Real Estate Terms You Need to Know
- Loan-to-value ratio – Lenders used this financial term to determine the ratio of how much they will loan you vs the value of the asset.
- Debt Service Coverage Ratio – The number of times the annual net operating income (NOI) will pay the annual debt service. Most lenders might require a ratio of 1.25 to 1.50.
- Capitalization (Cap) Rate – Ratio of NOI to the property’s Value. So if a property is listed for $1,500,000 and the NOI is $100,000 the cap rate is 6%.
- Cash on Cash – Ratio of annual before tax cash flow to total amount of cash you invested in the property.
- Vacancy Rate – % of units that are available or vacant in a rental property.
- These are just a few of the terms that you should be familiar with. Depending on the type of property you want to buy there are many other things you should be familiar with.
3. Visit Many Commercial Properties for Sale
- Determine what you like and don’t like about each property
- Evaluate and compare the condition, price, location, investment required, and allowed uses of each. Also make sure they can accommodate your current and future business needs.
- The closer you get to the downtown area of your city the more expensive they will be
- Do the annual revenues cover the principal, interest, tax, and insurance fees (PITI)?
- What is the property currently being used for?
- What are the approved uses?
- How much annual rent/income does the property currently generate?
- What are the assessed taxes?
- Why does the owner want to sell?
- What were the taxes last year?
- Is there area nice around the property? Is it getting better or worse?
4. Hire Experts to Help you Purchase the Commercial Property
- Commercial Real Estate Company in Austin, Tx
- Commercial real estate attorney
- Accountant / CPA
- Engineer if needed
5. Get Your Financing in Order So You Can Get Approved for a Commercial Real Estate Loan
- Talk to Conventional banks and Credit Unions
- What are the interest rates?
- How is your credit?
- Will the seller consider owner financing?
- Research terms such as Subject-to, seller carry back, lease options, second mortgages, etc…
6. Make an Offer to Buy the Commercial Property
- Have your attorney or commercial real estate agent draft up an LOI (letter of intent) or purchase contract. Make sure your attorney reviews all documents before submitting them.
- An LOI is a nonbinding agreement that will outline the basic terms and conditions.
- A purchase contract is more of a binding contract.
7. Don’t Forget the Due Diligence
- Physically inspect and review the property
- Review the as-built plans (mechanical, electrical, structural)
- Have the property inspected
- Order engineering & Phase I environmental studies.
- Verify zoning and use
- Get pricing estimates from contractors
- There are many more due diligence items to consider also.
The list above does not quite cover everything. If you would like to learn more about buying commercial real estate in Austin or determine if it’s right for your company don’t hesitate to contact us.