How to Buy Commercial Property: A Step-by-Step Guide

Start with a plan

Decide what you want the property to do for you. An owner-user buys a building to run a business in it. An investor buys for rental income and a later sale. The answer shapes the property type, the location, the loan and how much risk makes sense.

Set a budget and line up financing

Commercial loans differ from home loans. Lenders look hard at the property's income and at your own finances, and they usually ask for a larger down payment than a home loan does. Speak to a lender early so you know what you can borrow before you start touring.

• Expect a down payment and a shorter loan term than on a home loan, often with a larger payment due at the end of the term.
• Lenders check the debt service coverage ratio, which compares the property's income with the loan payments.
• Keep cash for closing costs, repairs and a reserve.

Search the market

Search listings by property type, location and price, and save the searches so new matches reach you by email. Compare several properties of the same kind before you narrow down.

Check the numbers

For an income property, the figures matter more than the look of the building. Work out the net operating income (rent collected, minus vacancy and running costs) and the cap rate (net operating income divided by the price). Then test how the loan payments affect your cash flow.

• Ask for the rent roll, the leases and two or three years of income and expense statements.
• Check that the costs are realistic, not just the seller's best figures.
• Run the numbers yourself in the calculators.

Make an offer

Many commercial deals start with a letter of intent that sets out the price and the main terms. It is usually not binding on the sale itself, but it frames the talks and often sets a period during which the seller deals only with you.

Do your due diligence

Once the contract is signed you get a set period to inspect the property and its paperwork. Use it fully. See the due diligence checklist guide for what to check.

Close the sale

Closing brings the loan, the title work and the payments together. A real estate attorney and a title company usually handle it. Read the closing figures against your estimates before you sign.

After you own it

Plan for management, insurance, maintenance and tenants. Many owners hire a property manager. Keep records from the first day, because they help with taxes, refinancing and any later sale.