Commercial Property Investment Due Diligence

May 25, 2022
commercial property investment due diligence

Commercial Property Investment Due Diligence
(11 Easy Steps)

Below are a few key things to keep in mind when getting into commercial real estate. Here are the 11 most essential steps to help you get maximum returns on your commercial real estate investment. By following these tips, you can rest assured that you’re making the most of your money while buying commercial property.

Step 1: Gaining The Commercial Real Estate Knowledge

Whether you’re investing in commercial real estate, stocks, or collectibles, you’ll find that passive investing is just a combination of knowing your possibilities, understanding your risk profile, and recognizing your restrictions to arrive at your core area of emphasis.

You must swiftly obtain the requisite commercial property knowledge and experience as part of the procedure. Unfortunately, saying it is easy than doing it. There is a wealth of information available for new investors in shares and residential real estate. Still, there is a lack of information available for beginners buying commercial real estate.

Some severe professional investors pursue a tertiary degree in property, which entails three years of full-time study and covers a broad range of topics. Macroeconomics, commercial and property law, accounting, valuation principles, statistics, business computing, commercial space, secure financing, urban economics, business forecasting, marketing principles, commercial asset management, business research, property investment, property development, urban valuations, and more are among the subjects covered.

That is what you will need to study if you want to completely grasp the ‘knowledge’ part of commercial real estate investing. And once you’ve built up your knowledge foundation, you’ll need to combine it with years of practical experience to ensure you’re fully prepared to take advantage of the market’s opportunities.

Many commercial property investors leave the essential in-depth knowledge to their consultants and instead focus on getting as much practical experience as possible. Going this way can affect your commercial real estate investing success. By regularly following our blog, you can quickly gain the required knowledge of commercial real estate purchase and development.

Step 2: Develop Your Investment Strategy

With some insights on emerging property investment and development trends, you’re sure to come across some commercial real estate investing opportunities.

Consider The Possibilities

You now have many potential paths (or alternatives) in front of you. And perhaps you could display them in a simple graphic, with the image below containing all of your alternatives.

On the other hand, creating your investment strategy may look to be an intimidating undertaking at present, simply because your options appear to be too many.

Check Out What’s Proper To Get Into Commercial Real Estate

You know what’s conceivable, but you need to narrow down your options. And you can do so by asking yourself, “Which of the different available possibilities best suits my temperament?”

Although a sound investment option may appear enticing, this is not necessarily a good reason to pursue it.

Negative gearing, for example, was strongly advertised in the 1970s and 1980s as giving excellent tax benefits. However, determining how much money to borrow was difficult for many people. Unfortunately, there is no correct answer to that problem—you must do what is best for you. For some people, borrowing 90% of the cost of a worthwhile investment is acceptable. On the other hand, a borrowing ratio of more than 50% of the cost would cause considerable distress to others.

As a result, you’ll need to figure out what we’ll term your “insomnia threshold.” As a result, you begin to understand better the kind of investments you should include in your portfolio.

That doesn’t mean you should stick to old habits, even if they’re the ones that make you feel most at ease. However, by introducing the concept of appropriateness, you may begin to narrow down your newly discovered possibilities.

When you compare what you perceive to be appropriate investments to potential property investment opportunities, you’ll be able to narrow down your options to something much more doable.

Know What You Are Capable Of Buying?

You must now assess your resources, both monetarily and in terms of time. That doesn’t mean you have to limit yourself to seeing alone. You might want to consider forming a syndicate with other like-minded investors and property managers to leverage your funds and share your risk.

To avoid spreading yourself too far and running yourself tired, you will, like most serious investors, need to hire professional property management expertise as your portfolio grows.

But, assuming you’ve decided to invest on your own for the time being, you’ll need to correctly examine your available money, which will be a combination of your current cash and any further equity you may have in other properties. Your diagram should now resemble the one given below.

Choosing A Primary Focal Area

As you can see, after applying these three ‘filters,’ you’re left with what’s possible, what’s suitable, and what you’re capable of investing in (in the centre of these overlapping circles). Only then will you be able to begin accumulating property riches.

Contrary to popular belief, the smaller your list of potential investments, the more focused and successful your real estate investment approach will be. It’s a straightforward procedure, but one designed to assist you in determining your primary area of interest!

And it’s a procedure that even seasoned commercial property investors go through now and then to keep themselves on track.

Like all types of investments, buying commercial real estate requires a strategy. Decide what kind of property you want to buy (office buildings, retail space, industrial warehouses, etc.), what your budget is, and how you plan to finance the purchase. Having a clear plan will help you stay focused and make wise decisions throughout the commercial real estate buying process.

Step 3: Research The Market

It’s essential to do your research before buying commercial real estate. Read market reports, consult with experts, and look at past sales data to understand where the market is going. It will help you make informed decisions about which properties to target and how much you should offer for them.

While researching for rental or commercial real estate markets, consider the following indicators –

Population Growth

An increase in the population often indicates a healthy real estate market. When people from out of state migrate to an area, the commercial real estate market is often inundated and turned into a seller’s (or landlord’s) market, which means you have an opportunity to profit from a once-in-a-lifetime investment opportunity.

The Revitalisation Of The City

Taking advantage of the real estate market during a city regeneration period is expected. Edmonton is an excellent example of a city undergoing rehabilitation, has a vital job and population growth, and is thus seeing an increase in local real estate prices.

The internet has become a valuable resource for people seeking commercial real estate investing opportunities. Finding a market that satisfies the above two requirements is more accessible when dealing with a competent financial advisor.

Step 4: Working With The Right Team

One of the most significant advantages of commercial real estate is that – it is a team sport. To succeed in this market, you need to partner with people who have expertise in financing, development, and property management. Finding the right partner can make or break your strategy – so take your time and find someone you can trust.

Step 5: Deciding On A Suitable Property

Given many properties available, you’ll need to stick to some tight standards. By doing so, you will simplify your decision-making process and add some consistency to your decisions.

To put it another way, you’ll need a simple framework for locating and filtering available properties. There are some specific buying criteria that you should know to make this process easier.

Office Buildings

These are used to conduct business and may include a mix of private offices, open-plan areas, and meeting rooms. It could be single or multiple apartment buildings.

Retail Properties

These are buildings or complexes used to manufacture, process, or store goods. These can include factories, warehouses, and distribution centres.

Each type of rental property has its own unique set of considerations when choosing a tenant. Knowledge of types of properties is crucial for a real estate investor. Office space tenants usually look for a building with Class A finishes and excellent transportation connectivity. Retail tenants may be interested in high-traffic areas and store visibility, while industrial tenants may be more concerned with access to transportation and utilities.

Industrial Properties

These are buildings or complexes used to manufacture, process, or store goods. These can include factories, warehouses, and distribution centres.

Each type of rental property has its own unique set of considerations when choosing a tenant. Knowledge of types of properties is crucial for a real estate investor. Office space tenants usually look for a building with Class A finishes and excellent transportation connectivity. Retail tenants may be interested in high-traffic areas and store visibility, while industrial tenants may be more concerned with access to transportation and utilities.

Step 6: Do Your Due Diligence

Commercial real estate investors that are seasoned turn over every stone to eliminate the chance of post-transaction surprises. Newcomers should follow the same strategy and avoid rushing into a contract, given the various dangers involved.

Commercial real estate acquisitions necessitate extensive due diligence to find critical facts that may not be readily obvious or available when determining a property’s or portfolio’s value. With thorough due diligence, you can crunch numbers quickly.

Step 7: Analyse Potential Properties

It can be the most perplexing and frustrating aspect for a real estate investor. You’ve found a few commercial properties that appear to meet your aims and criteria, but you don’t have a quick and easy way to narrow them down to a manageable shortlist.

Follow an approach that will assist you in grading your investment options. It simply integrates your objectives and criteria into a compact matrix, allowing you to score each of your potential properties quickly. Then, you must develop a predicted (four to ten-year) after-tax cash flow for each property. Unless you have financial analysis abilities or the necessary complex computer software, this is a job for a professional.

The financial forecast would take into account the following factors:

  • Price of purchasing
  • Cost of acquisition
  • Monetary borrowings
  • Costs of interest
  • Net rental
  • Depreciation
  • The expected sale price
  • A tax on capital gains
  • Costs of selling

Before buying commercial property, some property consultants or financial advisers will prepare cash flow predictions for you as a matter of course. Then, you can calculate the internal rate of return (the expected, after-tax percentage return on the actual equity you invest) for each property using those projections.

Step 8: Make A Financial Plan

Before making any purchase proposal for commercial property, you must have your financing in place. Or, at the very least, be confident that your financial source will approve your request.

One or more banks may already have a relationship with you (as most people do). They’ll not only look after you but will also offer you the most outstanding deal, given your long-standing relationship. Right? Maybe! But this isn’t always the case. I recommend you to speak with a few real estate brokers and financial advisors who can help you arrange your finances.

You should include the following in your plan for secure financing:

Income Statement

It is an inventory of your current income versus your expenses, also known as a profit and loss statement.

Cash Flow Statement

This document details the difference between generated and spent cash to determine whether your organisation has positive or negative cash flow.

Balance Sheet

The balance sheet depicts your company’s net worth to any loans and obligations.

Step 9: Make An Offer And Negotiate

If you’re in the market for a commercial real estate property, it’s essential to make an offer and negotiate with the seller before buying. By doing this, you can get the best deal possible and ensure that you’re getting what you want from the property. Work with your commercial real estate broker or agent to come up with a fair price, and don’t be afraid to make an offer that’s lower than what you’re willing to pay. By negotiating early, you can ensure you get the property you want at a price you’re comfortable with.

Sellers have been on the market for some time and are likely eager to conclude a deal. You can substantially increase your chances of success by preparing an offer package with all of the necessary information included:

Your structure of the offer

  • How you will finance the purchase
  • A thorough due diligence
  • Why this property is a good investment for you

Commercial properties are often unique, so it’s essential to be flexible during negotiation. Remember, even if you face rejection with your first offer, it’s not the end of the process. You can always come up with another offer.

By following these tips, you can make an excellent commercial real estate investment for your business.

Step 10: Profitably Manage Your Property

“You don’t make your profit when you sell a property; you make it when you acquire it!” 

To a significant extent, the above saying is correct. You can, however, acquire a commercial property well and then manage it poorly, losing a lot of money in the process.

If you decide to manage a commercial property on your own, you’ll need to gain a thorough understanding of tenancy legislation, statutory rules, and construction. The Essential Services Regulations—legislation covering monitored services within a building, such as air conditioning, fire services, elevators, and electrical equipment—is one of the primary areas of significant risk for landlords.

The owner will face severe fines if you do not comply. With so many new modifications, this is an area that might result in a wide variety of penalties.

That is why most active property investors opt to have their properties managed by a professional property manager.

Step 11: Market Your Investment Property

By purchasing commercial real estate, you may have made a good investment. Also, the property has been well-managed either by you or your property management company. Still, it will be an imaginative and highly professional marketing effort that will put the “icing on the cake” and help you get the most out of your commercial real estate investment.

That is why you must use caution when choosing an agent or consultant to advertise your property, as not all agents are up to date on current trends in property marketing in the twenty-first century.

What should you look for when choosing a commercial real estate sales agent?

I recommend that you start by reviewing their websites. Today, almost every commercial real estate agent in Canada, the USA, the UK, and other countries have a website. However, don’t rate the sites just on their aesthetic appeal. Instead, look at the level of information supplied to you, the investor, beyond the marketed properties.

Promoting a property is integral to marketing, whether through newspaper ads, direct mail, or fliers.

‘If you can convince individuals to read the first fifty words… then they will read the next 500,’ – say, advertising experts.

The more you ‘tell’ someone, the easier it is to sell them something. You can educate people through copy-intensive advertisements, brochures, direct mail letters and web pages. The most acceptable promotional content often resembles editorial copy and is enjoyable to read.

Just consider it for a moment. Do you buy a newspaper primarily for the advertisements? Most likely not. Instead, you buy it for the news and editorial content, engaging you and keeping your attention.

Another thing we’ve learned over the years is that many buyers were not searching to buy a house when they saw an advertisement or received a letter. So, by employing an editorial style, you may pique people’s interest long enough for them to begin reading what they initially perceive to be an ‘editorial’ or a personal letter.

The Bottom Line On Buying Commercial Real Estate

Whew! If you’ve made it this far, congratulations! You now have a solid understanding of what to do when buying commercial property. By following the steps outlined in this guide, you’ll be well on your way to owning a property that will provide years of income and growth.

Make sure you have your finances in order before making any offers for buying commercial property- this will increase your chances of success. You should also be prepared for negotiations, as sellers are likely eager to conclude a commercial real estate deal. Remember, it’s essential to be flexible during the process and keep in mind that every property is unique. You can successfully invest in commercial real estate with careful planning and execution!

Good luck in your search for the perfect commercial property investment!


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