If you have ever considered the thought of getting out from working underneath of someone else and working for yourself, you may have entertained the idea of buying commercial real estate. After taking a few steps towards the idea there may have been some frustration off the hop. Unfortunately, buying commercial real estate is about as straight forward as linear algebra.
If you asked a thousand people how to go about doing it you’d likely receive 1000 different answers. The main reason behind this is the obvious, no two businesses are alike, therefore they all have to be assessed and quantified by different means. Below are 4 items of consideration, along with some helpful information if you decide to try to get out from under the thumb of corporate Canada.
Commercial Real Estate Formulas
1) There are a ton of terms thrown around when it comes to commercial properties. ROI, cap rate, NOI, GOI, RCR, DCR and so on and so forth. Before even looking at properties, these terms can overwhelm a buyer to the point of backing off. My advice, persevere and learn which of these formulas are applicable. The calculations themselves generally aren’t that complicated and may or may not give you an idea of whether or not this business venture is a viable one.
For example, if you are looking into purchasing a residential multiplex, cap rate is something you are going to need to understand. Simply put, Cap rate is Net Operating Income divided by Market Value. If you are looking to buy a turn key multiplex this is simple. The NOI figures will be something your realtor can get from the seller and market value can also be determined by your realtor. Cap rate is market specific so you will need to calculate it for comparable properties in the same area or the number you arrive at will be meaningless.
You can use these formulas as a precursor before going to view a property. If the cap rate makes sense go view the property. If it’s too far off the mark, don’t bother. Again these are guidelines. It is never as simple as it may seem. If the property needs work, has been poorly managed or has additional potential offerings, this cap rate will likely be on the low side. Use your intuition and do your research before dismissing a property that doesn’t have a picture perfect cap rate.
For more exciting commercial real estate formulas you can visit https://www.strategicinvestmentrealtors.com/blog/andrew-schulhof/top-10-real-estate-investing-calculations
Commercial Real Estate Financing
2) Most lenders say they need between 35 – 50% for a downpayment but BDC (Business Development Bank of Canada) have quoted much higher LTV meaning lower down payments with the approval of a business plan. I haven’t personally had a client go through BDC but you can find information on them on the Government of Canada website. https://canadabusiness.ca/programs/bdc-consulting-1/
Financing typically takes much longer than it does in a residential setting, you will likely need 30+ days from top to bottom. Additionally, in the residential world most lenders will schedule and cover their own appraisals. Be prepared, commercial lending typically requires the buyer to cover the cost of the appraisal and depending on the property itself it can be expensive. It also isn’t uncommon for the lender to want an environmental assessment completed as well, keep this in mind!
I do need to stress, these are generalizations made from firsts hand experiences. It is best to talk to a mortgage broker, lender or bank for further clarity.
Zoning & Use
3) Make sure that the property’s current use or proposed use is included under that zoning category. You can find zoning by-laws on municipal websites to show you what uses are permitted. As an added precaution, it is always beneficial to get something in writing from the town to say that the current use or proposed use will be permitted. This is something your realtor can assist with by including wording in your offer to perform your due diligence in ensuring compliance with the local township.
4) It may seem like common sense but it is something that is consistently overlooked. If the property has to be renovated, make sure you determine cost and factor it into your overall investment. This can extend beyond the scope of just the work itself. Renovations and remediation is a time consuming endeavour. Procuring the right contractor can take time, they likely have jobs scheduled and it may be a matter of months before they can schedule in your project. Additionally, once the contractor begins, delays can take place for an infinite amount of reasons. Building code compliance, trade delays or strikes, discovery of additional issues (we have even come across situations where a human skeleton was found on site). Estimate a timeline from the date of purchase to the date of operation and factor in the carrying cost during this time.
Although purchasing commercial real estate can be a time consuming and mentally draining experience, the end goal could mean your complete freedom. As Tom Hanks once said, “It’s supposed to be hard. If it were easy, everyone would do it.”
If commercial real estate is something you have been pondering here are a list of local commercial properties for sale. Keep in mind, this complicated endeavour isn’t one you have to take alone. The Kore Team is here to help you navigate!
Wasaga Beach Commercial Opportunities
Collingwood Commercial Opportunities