The Bay Area is one of the best places to live in the United States and is becoming increasingly popular. Home to more than 7.7 million people, it features eclectic neighborhoods, outdoor recreation, rolling hills, an excellent educational system, and technology giants. With so much to offer, it’s easy to see why people are flocking to this area of the nation.
The real estate market is competitive, despite higher pricing and tighter inventories. It’s the perfect location for conventional and Airbnb investments and has continued to hold its value. If you’re interested in buying commercial property or want to learn more about real estate investing, here’s what you need to know about getting started with investment properties.
What is commercial real estate?
Real estate is deemed commercial when used for business purposes and containing five or more units. Like residential real estate properties, families or individuals lease the units. There are five main categories to divide commercial real estate into.
Multifamily
Multifamily homes are properties like duplexes, assisted living facilities, and apartments with more than one unit.
Office spaces
Office spaces are low, mid, or high-rise depending on the size and have room for multiple tenants. These are typically office buildings or medical offices.
Retail spaces
This real estate is designated for businesses that sell goods or services. They are often conveniently accessible spaces like malls and shopping centers.
Industrial spaces
Industrial spaces range in size and host industrial operations like manufacturing or assembly.
Hospitality
Hospitality spaces are establishments that cover services for travelers, like hotels, restaurants, and entertainment venues.
We can break down commercial properties further by putting them into one of three class categories.
Class A
This is the highest-quality building available. They typically have top-tier construction, are new, and are in the best location.
Class B
Class B properties can still be high-quality but are older and priced lower than Class A. These are best for investors looking to flip and restore them.
Class C
These properties are generally distressed, old, and in undesirable locations. They often require excessive maintenance and repair.
How to get into commercial real estate
Buying commercial real estate isn’t the same as purchasing a single-family home for personal use. Commercial real estate costs can be higher, and you may find it harder to secure funding. If you don’t have tenants to begin with, you’ll have to cover any expenses during unoccupied periods. The valuation for commercial real estate is also more problematic as it’s harder to find comparable properties. It’s wise to be careful before investing in commercial real estate and consider all factors carefully. There are a few steps to help prepare for purchasing the right property and achieving your goals.
Define your motivation
It’s essential to consider the reasons behind buying commercial property. While it’s a worthwhile investment, plans often fall through if you don’t have direction, so narrowing down your reasoning will help. Consider these questions.
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What do I consider a successful financial return?
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What are my goals for the investment?
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What will I impact through my investment?
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Do I want security for me and my family?
Are you purchasing this property for personal use or investment purposes? It’s possible to benefit from your real estate purchase in several ways, but many people choose one path. If you plan on using it as owner-occupied commercial real estate (OOCRE), you’ll use the property to conduct business operations. This has several tax advantages, like deducting annual interest on the loan and allowing you to build equity. You might also consider leasing the property to continue using it as an income stream. There are some roadblocks to this, like the cost of property repairs and routine maintenance. Check the zoning laws and know what limitations apply to the specific real estate.
Commercial real estate can also be used as an investment property, with many perks. This will generally bring a higher return annually and allow more cash flow opportunities and equity appreciation. Many tactics are used to achieve financial goals, such as land banking, fix, flip, development, and wholesaling.
Secure financing
One of the most essential tasks is to find financing for your property. You’ll want to compare various lenders before settling. It’s imperative to ensure that your lender can give you everything you need for your property. They’ll consider your credit score range and income to provide various options. Ask about any potential fees and penalties as well. You can use some standard permanent loans to secure commercial property. These include bridge, FHA, hard money, and SBA loans.
Hire a team of professionals
When handling real estate of any variety, having people with experience and knowledge working with you will benefit you greatly. Not only does this allow the process to move more smoothly, but it helps save you money. There are a few different professionals you should consider hiring to help.
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A realtor: Commercial realtors will undergo more training and obtain specific degrees in categories like business or finance. They’ll be able to help you through every step of the journey.
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Attorney: Professional real estate attorneys help save time, protect interests, understand laws, and ensure the agreement is legitimate.
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Accountants: They will handle the financial side of things and help prepare budgets and monthly reports.
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Mortgage brokers: A mortgage broker can find you the best lender for your needs.
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Contractors: The contractor will help oversee any renovations being made. This includes managing the entire site, including materials.
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Property managers: A property manager will help ensure the property has tenants contributing to its value. They’ll facilitate repairs, collect rent, and meet with tenants.
Find the perfect opportunity
Finding the perfect property that is desirable to tenants takes some consideration. Various factors come into play when determining the value of a property. Consider local economic trends, affordable leasing options, the growth potential, the layout and design of the property, and regional market data when searching.
Crunch the numbers
You’ll want to take detailed steps to ensure you meet legal requirements when dealing with commercial real estate. Due diligence is a crucial role here. This means you’ll want to assess the property and fact-check everything. Evaluate the location and compare multiple properties to ensure this option is the best.
Make an offer
Once you’ve done your due diligence and calculated potential costs and profits, it’s time to make an offer. This is where your team will come into play and negotiate the terms and finances.
The bottom line when it comes to commercial property
Buying commercial property can be more complex than standard real estate. It requires finding the perfect property for your goals, securing finances, hiring professionals, and handling the investment. Once you’ve done that, you’ll have an attractive investment that can start generating returns.
If you’re interested in Bay Area real estate and want to talk about investments, contact Scott Vaupen today. Scott is a leading realtor in the area with plenty of experience in helping clients find the perfect investment property. He’d be happy to help point you in the right direction.
