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What to learn before you buy commercial real estate property

The benefits of owning a commercial real estate property are many. First, you're dealing with companies and businesses rather than individuals. Therefore, your relationship with them will be conducted in a more professional manner. Second, commercial real estate properties often generate higher rent incomes than residential properties.

Before you buy a piece of commercial real estate, you'll want to ask yourself the right questions and learn some important vocabulary.

Asking the right questions. Before you purchase, get realistic about the kind of property you want by asking these questions:

  • Do you want to use the property for your business or rent it out?
  • What kind of down payment can you afford, and what kind of monthly mortgage payments can you afford?
  • Will you have a partner?
  • How much time can you put into this project?

Learn the lingo. There are different terms used in the commercial real estate business to evaluate the financial worth of a property as a good business investment. At the very least, learn the following words:

  • Loan-to-Value (LTV): This is the amount of your loan versus the value of your property. The smaller the loan compared to the value, the better.
  • Debt Service Coverage Ratio (DSC): This relates to the amount of debt you'll be able to pay off each year with the income generated from your property.
  • Capitalization Rate (Cap Rate): This is the amount of income the property makes divided by the property's value.
  • Cash on Cash: This is how much cash income you're generating from the property divided by how much personal resources you spent to buy it (perhaps that was merely the down payment money for your loan).

When you ask the right questions and learn the lingo before buying commercial real estate property, you'll have a better chance of making a good investment. Working with an experienced real estate lawyer during your purchasing of a new property will also keep you on the right track.

Source: 42 Floors, "7 Steps to Owning Your Own Commercial Real Estate," accessed Aug. 03, 2017

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