Commercial Property: How to Buy Commercial Real Estate

Are you thinking of buying commercial real estate (CRE), but feel overwhelmed at the thought of all the steps that are involved? If so, it’s a very understandable feeling. However, as a licensed real estate broker and former lending underwriter, I’ll share my knowledge and expertise in breaking it down into just 6 easy steps: choosing a property, nailing down your investment strategy, securing financing, selecting your team of pros, finding a property, and conducting your due diligence in finalizing the sale.

By following the steps in this guide, you’ll be able to understand the right property types depending on your investment strategy, how to secure financing from a lender, team members you should choose to help with the property management, and finally how to find suitable commercial real estate & get an offer accepted.

Commercial real estate is any land or property that’s used for business purposes. Common examples of CRE include offices, retail spaces, industrial buildings, parking lots, warehouses, medical facilities, hotels, malls, and apartment buildings.

Step 1: Select a property type
Step 2: Understand your investment strategy
Step 3: Secure lender financing
Step 4: Choose trusted professionals for your CRE team
Step 5: Find a property to submit an offer
Step 6: Conduct your due diligence and finalize the lending process
Frequently asked questions (FAQs)
Bring it all together

Step 1: Select a property type

Commercial real estate comes in many different shapes and forms. Different property types have varying characteristics and nuances that can impact whether they’ll be a good investment. These typically include differences in industry trends, repair items, regular maintenance intervals and costs, the type and quality of tenants, and more.

Below are some common property types you can consider.

Retail stores consist of companies that sell certain products or services to consumers. This could be anything from clothing, food, computer equipment, and more. Retail stores also have various types of classifications, with common types including apparel stores, convenience stores, grocery stores, department stores, warehouse retailers, drug stores, discount stores, and much more.

This is space that a business uses to run its operations. Depending on the layout of the building, office CRE can have a single tenant housed in the same building, or multiple tenants that each have their own assigned spaces. Offices can be as small as a residential home, or be as large as a high-rise property or skyscraper with as much as several million square feet in usable space.

As the name might suggest, industrial real estate involves property that supports industrial operations for businesses. These are typically located away from urban and suburban areas, along major transportation routes that have easy access to freeways and other major roads. Common examples include warehouses, distribution centers, and manufacturing & assembly facilities.

In the context of commercial real estate, multifamily properties are residential homes with more than 5+ units. Multifamily real estate consists of things like apartment complexes, condominiums, housing cooperatives (also known as co-ops), and townhomes. Depending on the type of property, there may also be additional classifications. Apartments, for instance, can be classified as either high-rise, mid-rise, low-rise, garden-style, and more.

Self-storage facilities rent storage units to individual consumers. Units typically operate with month-to-month contracts, and certain facilities may offer special features, such as enhanced security, video surveillance, and temperature-controlled units for storing sensitive items.

Commercial real estate classified as hospitality is used to provide customers with an enjoyable experience. Hotels, motels, and bed & breakfast are a few examples of this, as they’re buildings designed to provide customers with a location well-suited for rest, relaxation, and general lodging. Properties designed to provide food and beverages, recreation and entertainment, and travel can also be considered under the hospitality category of CRE.

Vacant land that’s zoned commercial and can be developed for industrial or other business purposes can be considered another category of CRE. Generally, this is a good option for investors willing and able to build properties on top of the land, but it can also be used as part of a buy-and-hold strategy, where the land is simply sold at a later date for a net profit once the value has gone up.

Example of one type of commercial real estate property investors can purchase. — High rise buildings, one of several types of commercial property you can invest in (Source: Envato)

Step 2: Understand your investment strategy

There are many different ways you can execute an investment strategy, and the one you choose could have a significant impact on your profits. Below are several common types of investment strategies you may want to consider.

Fix-and-flip

A fix-and-flip describes a transaction in which a property is purchased by an investor, and then repaired, remodeled, or otherwise improved. Once the improvements have been completed, the investor resells the property for a higher price. The idea here is that the investor will realize a net gain once all of the costs have been accounted for.

Wholesale

This is similar to a fix-and-flip, but does not typically involve any type of repairs or improvements to the property. Rather, the investor will have been able to initially get a great deal on the property, and then turn around to resell it for a profit.

Owner-occupied

Owner-occupied CRE has the investor living in some portion of the property, while utilizing the remainder of the property for business purposes.

BRRRR (buy, rehab, rent, refinance, repeat)

BRRRR stands for buy, rehab, rent, refinance, and repeat. These are the steps involved with this investment strategy. You’ll first find a property in need of repairs, complete the rehab, then rent it out. Once this is done, you can then refinance the property to a permanent loan or one with better rates and terms, and then repeat the entire process with another property.

You can check out our in-depth BRRRR guide for details on how this process works.

Buy-and-hold (land banking)

In some cases, investors may choose to purchase vacant land and then simply hold onto it. One possible outcome is that the future value of the land will increase, allowing the investor to then sell it at a higher price for a profit.

Development

Somewhat similar to the previous buy-and-hold scenario, the difference here is that the investor will take the additional step of building property on top of the vacant land.

Strategizing different ways to manage your finances. — *Your investment returns will be heavily impacted by the investment strategy you choose (Source: Envato)*

Step 3: Secure lender financing

Once you know what type of property you’re planning on buying and your investment strategy, the next step will be to secure financing. For most investors, this means getting a loan from a lender.

I strongly recommend evaluating your budget, finances, and cash flow if you’ll be going this route. While lenders will conduct their own review to see if you can afford a loan, their criteria may not factor in your specific financial business goals. Landing a loan approval from a lender also does not necessarily mean you can comfortably afford the debt payments.

Get a lender pre-approval

For this step, you’ll want to get a pre-approval from a lender. What this does is it gives sellers confidence that you have the money needed to purchase the property you’re making an offer on. Below are the steps I would take if I were to seek lender financing:

Understand available loan programs: A commercial real estate loan is a natural go-to for my first loan choice. It’s likely to have better rates and terms than any other lending program. However, depending on your qualifications and business circumstances, you can also consider hard money loans, bridge loans, and portfolio loan programs as they can be easier to qualify for and offer more flexibility for loan terms.
Shop lenders: Getting quotes from multiple lenders will help ensure you get the best available rates and terms. I would recommend considering different types of lenders as well, including credit unions, banks, business loan brokers, and online lenders.
Evaluate my qualifications: Common eligibility criteria for a loan includes your credit score, the strength of your finances, annual revenue, time in business or experience as an investor, the amount of your down payment, and available financial assets. The stronger you are in these areas, the more likely you are to get approved for a lender’s best advertised rates and terms.
Apply and provide required documents: Once you’ve found a lender that is quoting you rates and terms you’re agreeable to, you can submit a formal loan application if you haven’t done so already as part of the initial shopping process. You’ll then be asked to provide documents to support your ability to repay debt, which can include things like financial statements, bank statements, tax returns, and more. The lender will then conduct an evaluation of your application, and will issue a pre-approval to you if eligible.

White envelope with an approval letter inside. — *Securing lender financing is a critical step in ensuring you’ll have the funds needed to purchase your investment property (Source: Envato)*

Step 4: Choose trusted professionals for your CRE team

Whether it’s finding a property, finding a lender for financing, or having a network of contractors to help conduct repairs and regular maintenance for your property, it can be smart to assemble your own real estate team to take care of various aspects of the CRE process. This is especially important as your portfolio of CRE properties grows.

Here are several functions you should consider for your team of professionals.

Commercial real estate agent

A CRE agent has access to various CRE databases which can be used to locate properties and conduct preliminary research on which ones might be a good fit for you. They can also guide you through the process of negotiating the purchase price and other terms once you’ve decided to put in an offer to buy a property. Even if you’re confident you can do these tasks on your own, recruiting a CRE agent can allow you to get valuable advice and insight as a second set of eyes on each stage of the buying process.

Real estate attorney

A real estate attorney can help protect your interests when it comes to reviewing and signing contracts. This is especially true if non-standard purchase contracts are used, if addendums are included as part of the purchase, or if there are other highly complex circumstances surrounding the deal.

Accountant

An accountant can provide assistance with preparing and reviewing financial statements. This can be useful when you’re getting a loan, as lenders may ask for documents covering specific time periods. Having an accountant can also be helpful in evaluating the financial health and potential of an investment property you’re considering purchasing.

Contractor

Having a contractor on speed dial is great whenever you have a property in need of repairs or regular maintenance. They may also be able to help with larger jobs, such as remodels, renovations, and property rehabs. Not all contractors are created equal though, so make sure that the contractors you work with have the expertise in completing the types of projects you’ll need.

Property manager

Property managers can act as the intermediary between the property owner and tenants. They handle a variety of tasks such as ensuring that rent is collected in a timely manner, and that any repair and maintenance requests are properly handled. They can also screen tenants, oversee the negotiation and execution of leases, provide assistance with tracking the property’s finances, and ensure the property remains compliant with local laws and safety regulations.

A team of professionals meeting around a table. — *Having a team of professionals you can rely on is something that can save you time and allow you to dedicate your energy towards other areas of your investment (Source: Envato)*

Step 5: Find a property to submit an offer

When searching for a property, you’ll want to look for characteristics that it will provide an excellent return on investment. Location, financial performance, market trends, and historical market performance can provide insight as to its growth potential and future performance.

Many top CRE agents have a continuous stream of leads, which can be helpful when it comes to buying and selling real estate. Here are some tips on generating quality commercial real estate leads, something that can help you quickly shortlist suitable properties.

Characteristics to consider

Location: You may have heard the saying that the most important items in real estate are location, location, location. Where your property is located can have an impact on its potential revenue due to things like the quality of the local tenant pool, zoning laws, and local trends such as unemployment rates.
Financial performance: The ultimate goal is to ensure that you’re not only getting a good deal up front for the property, but that it will also generate sufficient revenue or a high enough sales price in the future. You can do this by evaluating the property’s financial statements and analyzing various financial ratios.

Common figures to evaluate include the cost approach to determine what it would cost to build the property from scratch, the market approach to see the property’s values against similar real estate, the income capitalization approach if you’ll be receiving income from the property, and a gross rent multiplier to see the potential value of a property based on its price and gross income.

Market trends: Consider economic and industry trends to determine if the market for your property is likely getting better or worse. This can include things like rental rates, vacancy rates, trends in construction costs, construction plans in the area for similar properties, and macro trends like unemployment rates for specific industries.

When it comes to gathering data, certain commercial real estate CRMs can reduce the amount of work you’ll need to do. Buildout, for example, provides comparable property data, and also has predictive analytics with built-in commercial property data. Check Fun RE Classes’s roundup of the best commercial real estate CRMs for some options.

Submit an offer

After finding a suitable property, your next step will be to submit a formal letter. This can be done with a letter of intent (LOI) to discuss general terms, with a formal purchase agreement covering additional smaller details. These are documents that you can have reviewed by your attorney to ensure nothing is overlooked.

A magnifying glass next to different homes. — *You may have to pass on multiple properties before finding the one suited for your needs (Source: Envato)*

Step 6: Conduct your due diligence and finalize the lending process

If the seller has accepted your offer, you can complete the final steps of the purchasing process. This involves completing your due diligence evaluation of the property, as well as providing your lender with any required documentation so that financing can be issued.

Conduct your due diligence review of the property

A due diligence review of the property can involve a review of its financials, as well as an evaluation of the property’s condition. Depending on the type of property being purchased, common types of inspections can include standard property inspections, appraisals, and environmental hazard evaluations.

Finalize your loan & secure access to funds

If you’re getting a loan, your lender must review the details of the property you’re purchasing, in addition to your own credit and finances. If you’ve previously been issued a pre-approval based on your finances, it will now need to look at your purchase agreement, as well as make its own determination as to whether the property meets its eligibility criteria based on things like its market value and condition. Depending on how much time has passed from when the pre-approval was issued, you may also need to provide updated financial statements.

Sign final closing documents

Upon being issued a final loan approval, you should be able to start the process of signing final loan documents. These documents spell out the terms of the loan you’re accepting, as well as how the loan proceeds are to be disbursed. Once the lender has reviewed the final documents to ensure they’ve been properly executed, loan proceeds will be disbursed to the seller and other applicable parties, and new title ownership documents will be recorded with the county to formally transfer ownership of the property to you.

If you’re thinking of buying additional commercial property in the future, think about how you’ll manage and track various tasks across your properties with our recommendations for the best property management software. The software featured in that guide can help with your marketing strategy, tenant screening, vacancy listings, and much more.

An individual holding a pair of keys. — *After signing the papers to finalize the sale, you’ll be able to get the keys to your new commercial property (Source: Envato)*

Frequently asked questions (FAQs)

This varies by lender, but having a credit score of at least 660+ makes it a lot easier to find a CRE loan. If you have a borderline credit score, it’s helpful to demonstrate other strengths to your loan application such as strong revenue, a large down payment, or a large amount of financial assets as reserves.

Many CRE loans have repayment terms of up to 30 years. This can vary, however, depending on the lender and specific loan program you choose. For instance, some lenders issue short repayment terms that are aimed at fix-and-flip investors. This is because it is expected that the property will be rehabbed and resold quickly, subsequently leading to the payoff of the loan.

Some of the best commercial real estate lenders can issue funding in as little as 1 to 2 weeks. This is dependent on the complexity of your loan application and the property being purchased. For more complicated scenarios, it’s not uncommon for loan approval to take upwards of 30+ days.

Bring it all together

Purchasing commercial real estate may seem like a complicated process, but it can be very manageable if you have a structured approach. It can also be well worth the payoff, as purchasing CRE for investment purposes can yield multiple benefits, including long-term revenue streams and appreciation in property value.

If you’re interested in being on the other side of the table by helping others purchase real estate, you can check out our guide on how to become a CRE agent for steps on how you can get started. Otherwise, let us know in the comments below if you have any tips you would include when it comes to buying commercial property!

Commercial Property: How to Buy Commercial Real Estate

Step 1: Select a property type