Thinking of purchasing a commercial building? Now is as good of a time as ever. Investing in a commercial property is advantageous for many reasons, the most prevalent being that it offers a good return on investment.
Like any investment however, it’s in your best interest not to go into it with a blindfold on.
There are several costs associated with owning a commercial property, many of which vary depending on the type and scale of the property.
Although this article is not exhaustive, the aim of it is to help you understand the many costs involved in owning a commercial property, and whether it’s a viable investment for you.
Initial Phase – Pre-purchase costs
To help you find an ideal property type (residential, retail, office, or industrial) and location, you’ll want to begin by working with a Commercial Broker. Commercial Brokers know the market inside and out and will be able to help you find a property that’s within your budget and preferred location.
Once a suitable property has been identified, the next step is to work out the pre-purchase costs.
- Due diligence fees, which includes:
- The cost of property inspections to determine if the building is in good condition.
- Environmental screening to allow the purchaser to see previous uses of the property plus any latent defects that may require attention and any risks associated with them.
- Working with a specialized commercial real estate attorney, as numerous legal documents must be accessed, evaluated, and verified. These documents may include: operating statements, leases, tax certificates, zoning regulations, surveys, and building reports.
- You might also consider hiring an Accountant to help you figure out what you can afford.
- Mortgage related costs which may include application fees and any legal fees during the application process.
- A Property appraisal to find out the market value of the property.
Costs Associated With Owning and Operating the Property
the costs of owning commercial property will generally fall into three categories: fixed costs, variable costs, and replacement reserves.
- Fixed costs include:
- Property Taxes – Whether it’s based on geographical location, determined by the municipality, or based on the property type, every situation is different and property taxes will vary as a result.
- Commercial Insurance – the purpose of insurance is to cover you for unexpected events like fires, floods, theft, vandalism, windstorms, etc.
- Mortgage payments – The down payment on a commercial mortgage can range between 25% - 35%. Monthly payments will need to be made to pay off the mortgage principal plus interest fees.
- Operating costs:
- Maintenance & repairs – during the due diligence process, you might discover that you need to do some repairs sooner than later. This can include big ticket items like the roof replacement, windows, siding, plumbing, heating and cooling systems, etc. Additionally, you’ll need to account for regular maintenance costs such as landscaping, janitorial services, snow removal, etc.
- Property Management costs –Hiring property managers can save you both time and money. A Property management company will take care of the day-to-day matters related to property maintenance, tenant relations, collecting rent, and preparing lease agreements. Your Property Manager can also deal with contractors and suppliers and take on project management duties.
Lastly, it can be beneficial to prepare replacement reserves to account for any future repairs for big ticket items like parking lot resurfacing or roof replacement, to name a few. During the inspection process, the Inspector will identify what might need to be replaced and when, giving you a general idea of how much to put away in order to afford these future costs.
When making a decision as big as this, remember to take your time, do your research, and work with appropriate professionals who can ease the burden of the decision.