Owning commercial real estate is very different from owning residential real estate. Once you own a commercial building, you may need to get the building re-zoned for different uses or upgrade the building for new tenants. In addition, residential tenants are happy to sign up for a one year lease. As a general rule, business leases need to run longer.
3 Things to Know Before You Buy a Commercial Building
The most important things to know include:
- Try to inherit a tenant
- Consider a partnership with a new tenant
- Work with a flexible lender
#1. Try to Inherit a Tenant
When you buy your commercial building, do your best to buy a building that already has a tenant. Getting a new business into your building can be time-consuming and costly. Once your business tenant moves out, you may wait for months to get another rent payment. Try to buy a building with an established business in place.
#2. Consider a Partnership With Your New Tenant
If you do need to find a new tenant and business start-ups in your area are slow, consider partnering with your new tenant to set the building up properly for their success.
Of course, if they want special equipment or something particular to their industry, that’s their responsibility. However, you may want to get their input on any updates you needed to make anyway. Every building will need work, updates to flooring and lighting fixtures, and paint. Consider connecting with your new potential tenant to make sure that these necessary updates work well for their needs.
#3. Work With A Flexible Lender
If it takes you a while to get a tenant into your building, your bank may be unhappy. It’s critical that you demonstrate that you have the funding available to cover any gaps in DSCR or Debt Service Coverage Ratio. No matter how small your payments are, your business will look rough on paper if it takes a year to get a tenant in the space.
If you have the cash flow from other properties, demonstrate that the debt will be covered while you upgrade the building and find a tenant. This will be critical if you seek refinancing to raise more capital to purchase any more property.
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