A variety of reasons support buying a commercial property for your business. One is that it can give you the flexibility to adapt the building to your needs and/or expand your operations. Another compelling argument in favor of purchasing a commercial property is that doing so can help you build equity, which is an obvious disadvantage to renting. Considering whether to buy or rent a commercial space can be difficult, and it is worth noting that those who rent will always, in a sense (and cents), be at the mercy of their landlord. If you have an opportunity to buy commercial real estate with a fixed-rate loan, however, you can make your expenses easier to manage and avoid the risk of either having to pay more in rent or move your business elsewhere. Purchasing a commercial property for your business could also offer you an array of potential tax benefits and deductions. This includes depreciation and the chance to deduct the interest portion of the mortgage payment. In addition, when you locate your business in the commercial real estate investment, you could potentially deduct the maintenance expenses from the business income. Also, there is a chance you could pay rent to yourself as the property owner, and the rent would be a deduction. What is Commercial Real Estate? Before diving headlong into the world of commercial real estate, however, it’s important to first understand what the term actually means. In general, commercial real estate encompasses the following areas: Multifamily - As the name implies, this refers to residential investment properties housing multiple families, such as apartment complexes, duplexes, triplexes, and even assisted living communities. Office - This refers to large, small, or medium-sized buildings capable of supporting a variety of businesses with a need for space, such as medical providers, attorneys, or accountants. Retail - This type of commercial real estate refers to a space that a consumer-facing business may be interested in, such as a coffee house, department store, or a suite in a strip mall. Industrial - This term refers to warehouses, production facilities, and distribution centers—basically any type of building a manufacturer may need. Hospitality - This area generally covers buildings that are either the current or former home of businesses in the service industry, such as restaurants, hotels, bars, or resorts. Within the confines of commercial office real estate, there are three different types: Class A, Class B, and Class C. Generally, Class A refers to commercial real estate of the highest possible quality. These are usually newer buildings with a prime location and good condition. Class B refers to middle-range commercial properties that may be older and lower in price compared to Class A, making them a good target for renovation and/or restoration. Typically, Class C commercial real estate refers to older properties in a less-than-optimal location with extensive wear and tear. How to Buy Commercial Real Estate For Your Business Consider the following elements when beginning the purchase process. 1. Identify Property Requirements This can be a difficult proposition, as a one-size-fits-all approach is simply not appropriate. Understanding your personal goals as a commercial real estate investor is essential, as your goals will influence the property requirements. Are you looking to build a brand or a retail establishment? How much foot traffic are you hoping to attract? Just like when you purchase a personal property, consider how much space you will need, the condition of the property and the location. 2. Secure Financing There are a variety of commercial real estate loans available with different terms and commercial mortgage rates. Bear in mind that, unlike a personal mortgage that may be able to cover up to 100% of the cost of the property, a commercial mortgage will typically cover only up to 75% to 80% of the cost of the property. Commercial Mortgage This refers to any sort of financing where the loan is secured by the value of the underlying commercial asset, which could include a warehouse, apartment complex, office building, shopping center, etc. SBA 504 Loan This is a loan program administered by the Small Business Administration (SBA), in which small business owners partner with Certified Development Companies (CDCs) to secure financing. Usually, a 504 loan will include a first mortgage for around 50% of the cost, from a third-party lender. The SBA will back a second mortgage, up to 40%. This would only leave the remaining 10% to the small business owner, allowing that individual to free up capital. The loan can be used to expand, buy real estate, or purchase equipment. Hard Money Loan This type of financing originates from private individuals and/or businesses, instead of traditional financial institutions. Generally, a hard money loan refers to a nonconforming loan that can be used to purchase a commercial or investment property, often with a much shorter duration and a higher interest rate compared to other options. A physical asset and/or property is usually required to serve as collateral for this type of loan. 3. Enlist an Experienced Team The fact that purchasing commercial real estate is an extremely complex and nuanced process makes it an intimidating proposition for many investors, which is why it’s essential to leverage the insights of a team with experience in different types of commercial real estate. To name a few, potential real estate investors should consider reaching out to a commercial real estate attorney, a property manager, a general contractor, an accountant, and a Realtor. Ready to start looking into financing for a commercial property? Learn more about commercial mortgages.