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How to Prepare Financially for a Commercial Property Purchase

How to Prepare Financially for a Commercial Property Purchase

Posted: 18th April, 2025
Updated: 18th April, 2025

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Category: Business Loan
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Written by: Shriram Finance
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Reading Time: 4 min

Buying commercial property is a major step for any business, and proper financial preparation is crucial. It’s not just about securing a loan but understanding the full range of costs involved, including down payments, closing costs, renovations, and ongoing operating expenses. Without careful planning, you risk cash flow issues or even foreclosure.

By assessing your current financial situation, exploring financing options, and budgeting for both immediate and long-term costs, you set your business up for success. So, let’s explore how to do financial planning for commercial property purchases.

Essential Tips for Commercial Property Financing

Here are some of the tips on the financial planning for real estate investment:

1. Assess Your Financial Situation

Reviewing your financial situation is an important first step when preparing to purchase a commercial property. This involves assessing key areas like savings, income, debt levels, and credit score for property purchases.

Banks or Non-banking Financial Companies (NBFCs) also want to see consistent income over the last few years that is sufficient to cover the monthly mortgage payments and other expenses related to the property.

However, high levels of existing debt can make it more challenging to qualify for a commercial real estate loan. Lastly, a credit score of usually 680 or higher helps ensure you get approved for competitive interest rates for commercial real estate loans from loan providers.

2. Determine Your Budget

Setting a realistic budget is key when financially preparing to purchase commercial real estate. This involves determining how much you can commit to the property price itself, monthly loan repayments, and additional ownership costs.

Loan calculators help estimate your monthly principal and interest payments. Budgeting for expenses like property taxes, building insurance, maintenance, repairs, and legal administration is also essential.

3. Explore Financing Options

Exploring different financing options is important when purchasing commercial property so you understand the requirements, costs and benefits of each. Common options buyers typically utilise include bank or NBFC, seller financing, or private lending.

Bank or NBFC loans usually require a down payment, a strong credit history, and solid financial records. Seller financing allows the buyer to pay the seller directly over time instead of needing loan provider approval. Typically, private lenders can offer more flexible terms but often charge higher interest rates. Certain government small business loans for commercial property programs also exist to encourage commercial real estate investment at competitive rates.

Discussing these alternatives with financial advisors allows you to compare interest rates, down payment expectations and eligibility standards across programs. This helps identify the most affordable financing method that is aligned with your budget and financial capabilities when moving forward with a commercial property purchase.

4. Understand All Costs Involved

Understanding all potential costs involved with a commercial real estate purchase beyond just the asking price is essential when assessing affordability and setting your budget. This includes both one-time fixed fees as well as ongoing ownership expenses.

Legally transferring a commercial property from seller to buyer requires attorney fees to review contracts, file paperwork and address liability considerations. Moreover, professional property inspections also come with upfront costs but provide critical information on structural soundness and potential repair needs. At the time of sale, transfer taxes and other administrative fees may also apply.

On an ongoing basis, commercial real estate owners face expenses like elevated property taxes compared to residential spaces, special commercial insurance policies, maintenance, improvements and repairs.

Meeting with real estate and financing professionals early when considering a commercial property allows you to more accurately assess both the purchase price and additional costs involved with ownership. This helps set expectations and budget appropriately.

5. Plan for Unexpected Expenses

Purchasing commercial real estate carries financial risks that call for proactive planning around emergency funds, vacancy costs and interest rate adjustments. It is prudent to set aside around 10-20% of the property's value to cover unforeseen repairs or expenses when challenges arise. Periods of vacancy where rental income ceases must also be accounted for in cash reserves to continue addressing mortgage payments and maintenance needs.

Additionally, loans with variable interest rates can see payments increase, so budgeting for potential rate hikes provides flexibility and stability. Discussing risk management strategies with real estate and financing professionals allows buyers to prepare for unexpected scenarios.

6. Make an Informed Decision

Making an informed commercial real estate purchase requires thorough due diligence, such as comparing area sales data, inspecting the property, vetting financing terms, and evaluating appreciation potential. Reviewing comparable property transactions in the local market establishes a benchmark for pricing and prevents overpaying.

Additionally, professional inspections mitigate the risk of unknowingly acquiring spaces requiring major structural repairs or system upgrades. Additionally, closely examining loan rates, repayment schedules, and any hidden fees prevents unwanted surprises.

Consulting local economic development forecasts provides perspective on potential commercial property value growth over the holding period as well. Conducting this level of research and analysis prior to finalising a commercial real estate deal leads to smarter long-term investment decisions.

Conclusion

Preparing financially for commercial real estate ownership takes strategic planning, number crunching and expert guidance. While the process involves many steps, the tips above help you organise your finances, access funding and set your investment up for sustainability.

Allow at least 6-12 months for preparation. Seek prequalification early, calculate all costs conservatively and assemble a support team. Following a methodical approach helps turn your dream of owning a thriving commercial property into a reality.

FAQs

1. What are the steps to prepare financially for buying a commercial property?

To prepare financially for buying a commercial property, check your credit score, assess savings, set a budget, explore financing options, understand extra costs, plan for unexpected expenses, work with professionals and conduct market research.

2. What are the financing options for buying commercial real estate?

The main financing options for buying commercial real estate are traditional bank loans, commercial mortgages, partnerships with investors, seller financing, crowdfunding, and tapping into personal assets like cash savings, home equity lines of credit, stocks and bonds, or retirement funds.

3. How do I qualify for a commercial property loan?

To qualify for a commercial property loan, you typically need a strong credit score of over 700, a few years of experience owning or managing a commercial property, a business plan for the property, prior years of strong financial statements and tax returns for your business, and sufficient income and assets to cover the loan payments

4. How can I improve my credit score to secure better loan terms?

To improve your credit score, pay all bills on time, keep credit card balances low, avoid opening too many new credit accounts, check for and dispute errors on your credit report, become an authorised user on someone else’s account if they have good credit, and consider taking out an instalment loan and diligently making payments.

5. What is the difference between fixed and variable interest rates for property loans?

The interest rate for a fixed-rate property loan remains the same over the full loan term, while a variable rate fluctuates up and down based on market conditions. Fixed rates provide consistent payments but may be higher, while variable rates have lower initial payments but carry the risk of increases if market rates rise over time, making payments unpredictable.

6. How do I evaluate the profitability of a commercial property?

To evaluate commercial property profitability, estimate gross rental income based on market rates, subtract estimated operating expenses like taxes, insurance, maintenance, utilities, and property management fees. Compare the estimated net operating income to the asking purchase price to calculate the capitalisation rate which estimates potential return on investment in percentage terms.

7. What factors should I consider when calculating ROI on a commercial property?

Key factors to consider when calculating return on investment (ROI) on commercial property are the purchase price and down payment required, projected annual gross rental income, estimated expenses like property taxes, insurance, maintenance, management fees, and utilities, the current interest rate for financing, etc.

8. How can I ensure that my investment aligns with my financial goals?

To ensure your investment matches your financial goals, define clear objectives, set a budget, analyse risks, and check potential returns. Research the market, choose the right location, and review loan terms. Moreover, plan for future expenses, work with experts and ensure the property supports long-term financial growth before investing.