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There are some similarities
between the purchase of residential real estate property and the purchase of
commercial real estate. The first similarity is that you would want to seek
the assistance of a licensed real estate agent. Second, you need to have
some idea about which type of commercial property investment you want to
purchase and where you would want it located. Certainly, your agent would
need some idea about your financial parameters and what type of financing,
if any, you might need to obtain. These are the same issues you would deal
with if you were purchasing residential property.
The differences that you
would find between being an investor in commercial real estate instead of
residential would be the type of property and the purpose for which it is
being purchased. Another difference would be the amount of financial
reserves needed. In commercial real estate, the unexpected expenses can be
extremely costly (i.e. foundations, air conditioning systems). Commercial
property generally requires a 20% cash down payment. Buying this type of
real estate requires a lot of money and expert financial, legal and real
estate advice.
In summary, residential real
estate focuses on the wants and needs of a homeowner and is a more emotional
decision. Residential sales are for individual use and are usually housing
for family units. Subjectivity is rarely a factor in deciding to buy a
commercial property. Return on Investment (ROI) is the determining factor.
Renting out your commercial space can certainly be an excellent way to earn
income and build equity. However, it is important to take into account your
time, skills and investment goals when making this decision.
So, you
want to buy your first piece of commercial property. Here’s a review:
1)
ASSESS YOUR FINANCIAL PICTURE & GOALS
Do you have
the finances to support this type of project? Seek advice from a loan
officer or financial advisor. Are you looking for something long-term to
generate income over time or do you need a steady income?
2)
DECIDE ON WHAT TYPE OF PROPERTY TO PURCHASE
Conduct research and/or ask for advice. What interests you? What area of
expertise do you have that fits the type of commercial property available?
You need to narrow down your criteria—property type, location and size. Be
watchful of your local market and identify opportunities.
3)
LOCATE A COMMERCIAL REAL ESTATE AGENT
Check out
the National Association of Realtors website. The webpage (http://www.realtor.org/commercial/index.html)
allows you to search for a Commercial Real Estate Broker in a particular
office, e-mail address, city, state, name, designation or field of business.
Simply click under Commercial Resources, Find a Broker and go! The search
results allow you to view the agent’s address, personal phone
number/fax/e-mail, website, license number, designations and Board
affiliations.
4)
CONTACT THE
AGENT
You’ve narrowed down your
search to an agent who is experienced in the area of commercial real estate
that you would like to purchase. Make contact with them via telephone,
e-mail or an office visit. Discuss your needs and
ask them to answer any questions
you may have.
5)
LOCATE A PROPERTY/MAKE AN OFFER/CLOSE THE DEAL
Once you’ve
located a property you’re interested in, work with your agent to negotiate
the best deal possible and accomplish your goal requirements. With time, you
will learn to structure deals too good to pass by. Be sure to check with
your local zoning ordinances to make sure your type of commercial business
will be allowed in your area.
Kellye Fox is a Realtor® with Property Consultants in
Chicago, IL. She can be reached at
708-497-0710 or kellyefox@msn.com.
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Terms To Know In Commercial Real Estate:
*Lessor—the
person who OWNS the property for lease
*Lessee—the person who is trying to lease the property for their use
*Return
on Investment (ROI)—the ratio of money earned (or lost) on an investment to
the amount of money invested
*Capitalization Rate—the net operating income of the property divided by the
purchase price of value of the property; a percentage of the value of the
income-producing property to its projected income
*Annual
Debt Service (ADS)—the amount of principal and interest to be paid each year
to satisfy the obligation of a loan.
*Debt-Coverage Ratio(DCR)—net operating income divided by annual debt
service.
*Gross
Building Area (GBA)—the total enclosed and unenclosed area of the building
at all building floor levels
*Rental
Square Feet (RSF)—the
area for which rent is typically charged; the usable area (USF) plus the
tenant’s percentage share of the building’s common areas (lobby space,
corridors, restrooms, etc.)
Commercial Mortgages
*Commercial Mortgage—A mortgage to be used to fund land or property which
will be used for commercial purposes.
*Can
also be used to purchase business assets like machinery
*Involve a more stringent set of conditions, including higher interest
rates, shorter amortization schedules, and higher equity positions or down
payments.
Commercial Real Estate Agent Designations:
*Certified Commercial Investment Member
*Counselors of Real Estate
*Institute of Real Estate Management
*Realtors® Land Institute
*Society of Industrial and Office Realtors®
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