If you’re thinking about purchasing commercial real estate, there are a few things you should know first. Whether you’re buying to grow your business’ production capacity, generate rent income, or expand your business to different locations, commercial real estate can be a great investment. The commercial real estate industry can also be complex for first-time investors, so here’s what to keep in mind about types of commercial properties and the buying process.
Types of Commercial Real Estate Properties
Commercial real estate is defined as any non-residential immovable property or land used for business that can generate income. The most common examples include:
- Office spaces — If you are a small business owner, you may need office space for you and your employees to conduct work if you are not a fully remote company. Office space leases are typically long term, and will vary greatly depending on location, infrastructure, and property management.
- Retail spaces — These spaces span a wide range of uses, from small locally-owned storefronts to large strip malls and restaurants. Most often retail spaces are more costly than others due to their location and proximity to high foot traffic. They are also typically long term.
- Industrial spaces — Industrial real estate includes properties such as warehouses, manufacturing plants, and distribution centers and is often located outside of urban and residential locations in large clusters.
- Multi-family spaces — If you’re looking to generate rent income from tenants, a multi-family property might be the right choice. Multi-family real estate has multiple units within one structure (like an apartment building, condo, or high-rise structure). Investors in multi-family real estate generate income while not primarily residing there.
- Mixed-use spaces — These spaces are popular in urban areas and bigger cities. They usually include retail locations or restaurants as well as office or residential space. Mixed-used spaces also include hospitals and hotels.
It’s also important to note that commercial real estate properties fall under three different classifications: Class A, Class B, and Class C. Class A properties have the highest quality buildings, have been built more recently, and are situated in an ideal location. Class B properties can still be in relatively good condition but may need to be renovated. And Class C properties are typically older and require significant maintenance and aren’t located in ideal areas.
The Buying Process
Purchasing commercial real estate is more costly than that of buying a residential single-family home. It can be more difficult to find funding from lenders and you are responsible for covering any costs that come with unoccupied space. As an investor looking into commercial real estate, you also need to be able to find properties that are comparable to the ones you are interested in to identify valuation, which includes size, features, and location.
If you are ready to buy, consider these factors:
- Have a clear and sustainable reason why you want to invest in commercial real estate. Ensure there is a significant financial return over the potential risks involved.
- Be sure to first secure strong financing from a lender before moving forward, and always compare options before deciding. This means considering the loan-to-value ratio, or how much a lender is willing to give you in comparison to the overall value of the property.
- Consider your lending options, including if and how much collateral is required to secure funding.
- Consult with professionals like realtors, lawyers, accountants, mortgage brokers, and property managers.
- Keep up to date with the most recent economic trends, zoning laws, property values, and growth potential.
Most importantly, you should always run the numbers ahead of time and decipher what makes sense for you as an investor. If you need additional help making commercial real estate decisions, Republic Bank is here to help. Give us a call at 800-526-9127 to speak to one of our expert representatives. Plus, check out our resource library for more financial tips.
