What to look for when buying a commercial property

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Investing in commercial property is similar to investing in residential property, but the stakes are often higher. Commercial property requires a larger investment, has fewer potential tenants and is more difficult to sell compared to residential property. When buying commercial property, there are a number of factors that an investor should consider to improve the odds of buying a property that will produce a stream of income and appreciate in value. Potential commercial property owners must look at properties from the perspective of a business owner, as only successful businesses make good tenants.


What to look for when buying a commercial property

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Investing in commercial property is similar to investing in residential property, but the stakes are often higher. Commercial property requires a larger investment, has fewer potential tenants and is more difficult to sell compared to residential property. When buying commercial property, there are a number of factors that an investor should consider to improve the odds of buying a property that will produce a stream of income and appreciate in value. Potential commercial property owners must look at properties from the perspective of a business owner, as only successful businesses make good tenants.


Step One

Distressed Sellers - A distressed seller is motivated to make a deal, which holds the prospect of getting the property at a good price. As in the residential real estate market, property owners may experience personal financial problems that require a quick sale of a property. A variety of situations may cause a property's listing including divorce, lawsuits and retirement. Foreclosed commercial property is another possibility for investors to consider. Banks and other financial institutions want to move these properties off their books and may even offer financing deals to willing buyers.


Step Two

Location - As with any real estate purchase, location is important. Small retail shops will do best where there is a lot of foot traffic and access to nearby parking. Large manufacturing facilities require access to highways and other shipping sources. Investors need to consider the type of property they are buying, who the potential tenants are, and what location will best serve those tenants. Local crime rate, zoning restrictions and jurisdictional tax rates should be a consideration as well.


Step Three

Income Potential - To determine a fair price for a commercial property, investors must determine the income the property will produce. In a building with current tenants, the seller should be willing to provide this information. In an empty building, determining future rent receipts will be difficult. Investors will have to research the local market for comparable properties to determine what a building will produce. Investors should also realize that commercial properties with just one tenant will be heavily dependant on that business. Multi-unit buildings are another option. When one unit is vacant, the others will continue to generate income to cover costs including mortgage payments, maintenance, repairs and taxes.


Step Four

Local Economy - The success of many businesses will rely on the strength of the local economy. An exception to this is manufacturing companies whose products ship to various locations. Which sectors of the economy will impact the potential of a commercial property will vary depending on the building's tenants. However, most commercial buildings are easily adapted to a variety of businesses from retail space to office use. A well placed commercial property can serve a variety of businesses successfully. Commercial buildings located near stable employers such as government office buildings, universities and hospitals also provide additional stability to tenants.


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