A few tips about buying commercial real estate

Posted: Saturday, October 8, 2011 6:28 pm

By Mark Hampton, Toya Ohlrich and Joe Castilleja For New Braunfels Herald-Zeitung 

NEW BRAUNFELS — You’ve heard the old saying, real estate is about location, location, location. And it’s pretty much true regardless of the property type or owner.

Location is definitely important when it comes to commercial real estate. But once you get past this universal truth — that location is key — the differences between the residential and commercial varieties start to emerge.

Residential real estate is about your primary dwelling place. It’s about having a roof over your head for you and your family.

But commercial real estate is quite different. It’s usually about producing income for a business owner or investor. Which brings us to what I like to call the two types of commercial property owners:

1. Users

2. Investors

Users are typically business owners. They need commercial real estate space to house their business. It provides a place for them to sell their products or services. Issues like accessibility/parking, proximity to other businesses that create customer traffic (traffic counts), community demographics, applicable zoning, visibility and, of course, costs are all important. Users can buy or lease the commercial property space for their business.

Investors are a different breed. They’re looking for the commercial property itself to be their income-generator. They’ll buy commercial properties and lease them to others, eventually selling parts of their commercial property “portfolio” when it makes sense to do so.

Investors see real estate as a good alternative to some of the options available on Wall Street. Real estate is less volatile, a good long-term investment and, in Texas, very consistent. Commercial real estate provides two big advantages for investors:

1. Income production

2. Tax depreciation

Investors, typically on the advice of their accountant, will eventually sell a commercial property when its depreciation cycle is coming to an end, taking the profits from the sale and reinvesting in another property through a 1031 Exchange. This is why some large chains/franchises build new stores and retires others.

If you’re thinking of buying commercial property, whether for its direct use (from which to run a business) or as an investment, it’s important to hire a Texas Realtor experienced in commercial real estate. Realtors with the CCIM (Certified Commercial Investment Member) designation have undergone specialized training in commercial real estate.

Also, realize that financing the purchase of a commercial property is different from obtaining a home mortgage loan. Commercial real estate loans usually require at least a 20 percent downpayment, are traditionally amortized over 20 years, and have a three- to five-year balloon. Meaning they reset after 3 or 5 years with a new rate depending on the market.

In Texas, a large share of state and local revenues — particularly those that fund public schools — comes from property taxes. In local communities, it’s advantageous to have a good mix of residential and commercial properties in order to have a broad tax base. That way, individual homeowners aren’t overburdened with an unfair share of the tax load.

Commercial real estate has similarities to residential real estate. But whether you’re considering being a user or investor, you can see there’s more to finding the right space than just location, location, location.