Buying Commercial Real Estate: How to Protect Yourself

Buying commercial property is a very good long term investment as long as you know what you are doing.  Otherwise it can also be a huge financial disaster.   If you do not want to make a mistake that you will regret for years to come, you may want to follow these tips on how to protect yourself and your investment:

Commercial Investment Tips

  1. Education.   If you are a new commercial real estate investor, educate yourself as much as you can by working with a mentor. To start, only invest in one specific type of commercial real estate. Once you become knowledgeable and are confident, you can look into different investment opportunities.
  2. Financing Approval. Get pre-approved for your financing so you know how much to spend on your commercial property investment and to avoid unnecessary delays when you find a good deal.
  3. Partnership.   Partner with another investor, friend, family member or business associate if you don’t have a lot of cash for a down payment. Join an investment club so you can meet other investors with similar investment interests.
  4. Consider Tax Consequences.   Form a holding company for tax purposes to hold the real estate.   Check with your tax advisor as to which type of entity you should use, such as corporation, LLC or partnership.
  5. Appraisal.   It is important to review your appraisal carefully to determine the value of your property to make sure you are not paying too much for the property.
  6. Inspections.   Read your inspection report and pest control report carefully. Be sure to go over any items that you have a question about with the inspectors. If there is any structural damage or major repair work that needs to be done, this means your investment costs are going to be higher and it will take longer to recoup them.
  7. Due Diligence.   Do your homework by checking the commercial lease agreement terms, the zoning, the property history, and any environmental issues as well as permits you may need if you are planning on remodeling.  Zoning is important because you need to make sure that the property is zoned for your intended use.   Environmental issues such as a leaking underground tanks, toxic spills, or toxic waste sites can contaminate ground water, soil and air quality and expensive to clean up. Many lenders require environmental reports before they will loan on commercial property. You should order a report whenever necessary, or if you have any concerns. They are expensive, but well worth your peace of mind.  

When you invest in commercial real estate, you take on the responsibility for repairs and legal issues such as environmental cleanup. That is why it is important to do your due diligence, read all your inspection and appraisal reports and ask questions.   You should also consult a real estate attorney.

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