Commercial Real Estate FAQ: 10 Common Questions
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Commercial real estate is its own animal, its own planet, and even its own galaxy these days. Far far away from residential real estate is a world that has produced plenty of multi-millionaires and freed people from the old 9 to 5.
Without going full late-night infomercial, CRE is a big deal, and following the CRE world can leave you with more questions than answers.
No problem: below are ten of the most common questions you’ll most likely have getting started in CRE and timely answers.
#1 – What Counts as Commercial Real Estate?
Commercial real estate is diverse, including land, self-storage, multi-family housing (over four units), lab space, industrial, warehouses, office buildings, retail, and more.
Commercial property can come in many sizes and structures, from small coffee houses to car washes. It does not, however, include residential housing.
#2 – What are Some Terms I Need to Know in CRE?
Here are a few quick terms that you need to know in the CRE world:
- Net operating income: this is the property’s income after all expenses are taken out.
- Cap rate: the ratio of net operating income against the property valuation. NOI / Value is the equation to remember for cap rate calculations.
- Triple net lease: A rental rate that does not include the landlord paying operating expenses like insurance, utilities, or taxes.
- Letter of intent: think of the LOI as a way to get down details of an agreement before anything is set in stone.
- Submarket: divisions of bigger markets, marked by geographic location
- Net absorption: the amount of space occupied over a given point in time while subtracting out vacancies.
There are plenty of other terms that you’ll run across in the greater world of real estate, but these terms should help give you a better understanding as you watch videos and news articles about the industry.
#3 – Does Zoning Matter?
Zoning is location-specific and does make a difference in terms of what you can do with a property. Some zoning regulations permit commercial developments while others do not.
Certain municipalities may restrict commercial property development in certain areas that are too close to densely populated residential ones.
It’s best practice to research what’s allowed and not allowed in your specific area.
#4 – Do I Need a Broker for Commercial Real Estate?
The easy answer is that no, you do not need to get a broker for commercial real estate.
You can technically buy CRE on your own, but having a professional help you through your deals will save a lot more money in the long run.
An important point to note is that in the event of a sale, the commissions are paid out by the seller, not the buyer.
#5 – What’s the Best Location for CRE?
Like many business questions, the answer is easy: it depends. Can you pick up land for cheap in Belle, MO? Sure you can. Is it going to have the same value as land in Jacksonville, FL? Of course not.
The two areas are completely different. Belle is a very small town in Missouri, whereas Jacksonville has multiple economic sectors and a very lively community around it.
Location is about demand. You’ll find that CRE is about looking at what’s happening in the news on the national, state, and local levels.
Is the local city council approving new developments or resistant? That’s just one question to think about as you think about location.
#6 – Do I Need a Lot of Money for CRE?
This is a hard question to answer, simply because there’s commercial real estate in just about every city, town, and even small village.
Property designated for commercial use is everywhere, all at different price points. If you’re eyeing a market like NYC, you’ll need more money than if you’re trying to pick up things in Fort Scott, KS.
If you’re trying to get into CRE on a tighter budget, look for distressed properties that can be picked up for less money than something that doesn’t need renovation. However, the renovation will add costs that may be unsuitable, so examine your business situation carefully.
It’s also not uncommon to borrow money to make more expensive commercial real estate investments, but you should do so only with the help of a certified advisor.
#7 – Should I Partner With Others for CRE?
Partnering with other people multiples the money available to invest, but it also multiplies the complexities.
Working with other people means that agreements have to be in place, and multiple conversations must be held before a partnership becomes legalized.
Just like in marriage, who you partner with in business makes all the difference. If you go the partnership route, it’s important to spell out exactly how the partnership should operate before moving forward.
#8 – How Do I Find the Right Commercial Property?
There are a few places to start looking for commercial property: online through free commercial real estate listings, through word of mouth, and by looking around local advertisements.
Sometimes the “for sale” signs are harder to spot, but they’re everywhere you look. It’s also a good idea to consider building a well-informed network by surrounding yourself with those in the industry.
This way, you can get the professional advice you need to get started. LinkedIn may be a good place to start.
#9 – Is It OK to Buy One Type of Commercial Property?
Starting with one type of commercial property gives some advantages, including the following:
- The ability to develop a specialty. Sometimes being the go-to person for self-storage or for multi-family tends to earn you access to deeper levels of your local real estate community.
- The power to understand how prevailing market trends affect your particular type of commercial property.
- The power to also understand how properties within the specific asset class perform gives you an advantage in future negotiations.
Fine-tuning your commercial property journey involves developing knowledge and then putting that knowledge to good use.
#10 – When’s the Best Time to Enter the Market?
The best time to enter the market is today. Even if you don’t buy anything, it’s never bad to look around your local area for commercial property. Driving for dollars isn’t just for residential properties, after all.
Taking your time with your first property is somewhat of a double-edged sword. While it’s true that you want to find the right property, you also don’t want to fall into the trap of paralysis through analysis.
The right property is out there, waiting to silently generate income as part of a powerful portfolio.
The first property is often the hardest to acquire, but it’s the start of something truly transformative with the right system behind you.
This commercial real estate FAQ may not address all of your questions, but it’s enough to get started.
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