Four things to consider when buying a commercial property
Aug 1st, 2019 | By FCT
Buying a commercial property can be a great investment as these properties tend to yield better financial returns compared to residential properties. But there’s also more risk for the investors.
A location that is trendy today might not be so in just a couple of years. And there’s the fact that selling commercial real estate in a real estate slump can be difficult.
Keep in mind that your cash flow can take a hit due to expensive repairs, tenants who don’t pay rent and so on. Yet, the potential rewards for a commercial investor can be substantial.
Here are four things to consider when buying a commercial property:
1. Look for properties that line up with your investment goals
First, think about what you hope to get out of your investment. Then you can look for an investment that will help you reach that goal.
For example, you may be looking to renovate an outdated office or retail space, then sell it for a quick profit. Or you may be interested in preparing for retirement and want to secure an investment opportunity that will yield residual income over the next 10 or more years.
There are multiple types of commercial real estate options. Hotels, office space, strip malls and shopping centers, vacant and raw land, or industrial buildings are all examples. The type of property you consider will really depend on your individual goals.
2. What renovations does the property need?
Most commercial properties will need a few changes to suit your needs. In order to get a true sense of the total cost of your investment, you need to factor in renovations.
Likely there will be some wear and tear that you’ll need to address. Or the property may need a facelift to make it more modern so that it appeals to more tenants.
Then there are bigger projects to consider like dealing with lead paint and asbestos and replacing the roof. Some commercial investors choose to change the layout of the property to make the space more efficient.
Getting saddled with unexpected renovations after you’ve purchased a business can cost you more than you anticipated. That’s why it’s a good idea to find a contractor who has experience in your industry and ask for an estimate of the costs for the necessary renovations.
You may also need to bring in other professionals such as an electrician or a plumber for their expertise. That way you are better able to narrow down the true costs of the necessary renovations.
3. Secure your financing
If you don’t have a “subject to” financing clause in your agreement of purchase and sale, you’ll likely need to have your financing in place to help you purchase a commercial property. “Subject to” financing allows a buyer a grace period of up to seven or more days after the offer is accepted to secure funds. The buyer can walk away from the offer if he or she is unable to secure the necessary financing.
There’s more than one way to secure real estate funding.
Do your research and look at what credit unions, banks and mortgage brokers can offer you.
You can also explore other financing options such as the following:
- Leasing is an alternative to purchasing a commercial property. In this case, you would sign an agreement with the property owner in order to use the property for a specified period of time for your business.
- Vendor take back is owner-provided financing. Some sellers are willing to act as the lender and carry a first or second mortgage on the property. Then, as the buyer, you would make monthly payments to the seller.
4. Protect your assets
Once you have your new commercial property lined up, make sure it’s well protected.
Research the different types of insurance and don’t forget to add commercial title insurance when you purchase the property.
Commercial title insurance is the best way to protect yourself against unforeseen losses, title and off-title related issues. Find out more about how title insurance can protect your investment in commercial real estate by visiting our site or calling us at 1.866.804.3112.
Subject to certain exceptions, commercial title insurance policies equal or below $10M CAD are provided by FCT Insurance Company Ltd. Commercial title insurance policies above $10M CAD are provided by First American Title Insurance Company. Reference should be made to policy documents to confirm the insurer on any individual transaction. Services by First Canadian Title Company Limited. The services company does not provide insurance products. This material is intended to provide general information only. For specific coverage and exclusions, refer to the applicable policy. Copies are available upon request. Some products/services may vary by province. Prices and products/services offered are subject to change without notice.
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