Purchasing commercial real estate property can be an intimidating experience, as there is so much more to consider than a residential real estate purchase. The process itself can be overwhelming, especially for a first-time investor, but working hand-in-hand with an INCO Commercial agent will greatly ease the burden. Our agents are armed with years of experience, expertise, and local market knowledge. We are confident we can help you find the best property at the right price to suit your needs.
The following is a basic overview of things to consider and expect when preparing for a purchase in commercial real estate.
Determine Your Objective
You probably already have a good idea of the intended use of your future commercial real estate property. The use of the property will ultimately help determine the importance of other factors when purchasing your ‘ideal’ property.
When our clients come onboard with INCO Commercial, we perform a Client’s Needs Assessment to ensure that we fully understand our clients, their goals, and requirements for the property. Our philosophy is to keep our organization and business client-centered, and getting to know our clients is top priority in order to best serve your needs.
Analyzing the CAP Rate and Operating Income
Examining the capitalization rate (CAP Rate) and operating income are also key factors in determining interest in a property. Net Operating Income (NOI) is the income the property generates, less the cost of operating expenses.
The CAP Rate is the ratio of NOI over the cost or value of the property, just one of the metrics used in measuring the value of real estate. Basically, analyzing the CAP Rate can help you figure out how fast the investment will pay for itself, and also give insight to the risk factors associated with the property.
How will you be financing this endeavor? Know how much you can afford to pay, and who you might be financing through. If you’re not familiar with some of the commercial real estate terms, we can help you understand what is your LTV (loan-to-value ratio), DSC (Debt Service Coverage Ratio), Cap Rate, Cash on Cash, and Ad Valorem, for example.
This is the most clichéd, but truest components when it comes considering any property. The location has to serve your investment’s purpose well. INCO Commercial is committed to finding the best match between you and a property or space to fulfill your interests.
We’ll help you consider the intention, requirements, and features of a prospective property. If the intent of the property requires heavy foot traffic for customers to interact with your business, then obviously looking for something in an urban or downtown suburban area is desirable. Having a good understanding of your customer base also helps in choosing location, to determine where those customers are and how to get in front of them. If this is your first venture and you’re unsure about your customer demographic, observe your close competitors and see what kind of clientele they attract.
Access for people with disabilities and adequate parking are important things we will also consider. On one hand, being in a high traffic/high volume area is great, but losing out on business because your customers can’t find parking or access and go elsewhere is a detriment.
We discuss the positives and negatives if the neighborhood is undergoing gentrification; the finished product could be ideal for your business, if it coincides with your timeline, or it could hold back traffic flow if it doesn’t. If you’re requiring more of a warehouse or distribution space, an industrial center closer to a freeway might be more ideal.
Expansions or the need to lease part of the property is a real consideration which we will address as well. Would your business or the prospective property allow for expansion in that same location? Or, going the other way, would you consider leasing the extra space if it ended up being too much for your needs?
As part of the due diligence process, INCO Commercial will also help you discover the property’s past uses and limitations and how that factors into your purchase. The physical demands placed on the property or the structures could mean potentially costly repairs for you down the line. Our agents are well-versed in the type of zoning laws and building codes particular to the local area, which determine what kind of alterations are legally allowed.
Allow Time… and Due Diligence
There’s a lot that goes into changing hands on a commercial real estate venture, so naturally the process could potentially take longer. Keep in mind that it is actually both the buyer and the seller’s responsibility to do due diligence on the property, which may or may not end up working out for you in the end. This process in itself can take a few months, but it is worth it to protect yourself from a bad deal. Our agents at INCO Commercial will ensure the due diligence process is meticulously handled and guide you through accordingly. We work hard to make sure your money is invested wisely and that the property best matches your needs, but sometimes unexpected reveals from the inspections, reports, or the appraisal can negate interest. Expect to make a small investment towards due diligence, but know that it can save you from some potentially unpleasant surprises and their subsequent costs, and/or help confirm your choice in property.
Letter of Intent or Purchase Contract
When you are ready to make a serious offer, INCO Commercial can help draft a Letter of Intent (LOI), and/or a Purchase Contract. An LOI, as the name suggests, is a typically non-binding document (unless declared otherwise) outlining your intent, as the buyer, to purchase the specific property at “x” price, along with a summary of the principal terms and deal.
The Purchase Contract is the legally binding document which details in full the terms of the transaction, listing of parties involved, adjustments, recitals, conditions to closing, etc. for example. Our agents determine for each individual case whether both an LOI and Purchase Contract are necessary, or just the Purchase Contract.
These are just some of the aspects of purchasing a commercial real estate property. INCO Commercial is highly dedicated to our clients; we work closely with you through each step of the process. Our extensive local knowledge, experience, and commitment to your best interest drives us to find the right match in order to maximize your profit gains. Check out our website for more information, or contact us to start your new business venture today!