WHAT TO LOOK FOR WHEN BUYING COMMERCIAL PROPERTY

by | Jan 9, 2023 | Real Estate

Commercial land for sale offers lasting investment potential and can be an ideal entry-level purchase. Generally, commercial land will be priced considerably lower than commercial real estate (CRE), and it requires very little maintenance.

Related: 5 steps to building the luxury home of your dreams

Choosing the right property at the right time can reward the buyer with a high return on investment. Land is a finite resource, and developers and businesses planning to build retail, multifamily or industrial properties will be willing to purchase or lease the land (this is commonly known as a ground lease).

Buying commercial property: Before you shop, stop and think

Before you begin your search, you’ll need to decide several things in advance.

  • What sort of return on investment (ROI) are you expecting, and when?
  • If your investment budget won’t cover your purchase, will you consider fractional ownership or a real estate investment trust (REIT)?
  • What are your financing options if you’re not planning to pay cash?

If you plan to finance your land buy, you’ll need to qualify for a loan before you proceed.

Financing for commercial land

Not all banks will finance commercial real estate, and those who do will generally require a higher credit score and down payment (this can be 20%) than for a residential mortgage.

If you decide that you’re not ready to make such a large cash outlay, consider fractional ownership of commercial land. This allows you to share ownership of a land purchase — plus any passive income if it’s leased to a developer — with other investors while making a much smaller investment.

After you’ve sourced your financing, it’s time to research the local regulations that apply to commercial land.

Land zoning and permitted usage

Nobody wants to begin negotiating a land purchase only to learn that it’s not zoned for commercial use. This is why it’s important to learn local zoning regulations.

Ideally, you’ll visit your city or county recorder’s or tax office and locate staff who can answer your questions. This is because, even if your planned purchase is zoned commercial, there may be restrictions on its use.

For example, your city may incorporate these into its commercial zoning policy:

  • Functional regulations that determine what types of land use are permitted based on the developer’s plans and if the area will be positively or negatively impacted.
  • Aesthetic regulations may include guidelines for a developer’s blueprints for a planned building, down to the public landscaping and color.

While you’ll need to familiarize yourself with zoning regulations before any land purchase, this knowledge could help you purchase a vacant land bargain.

Buying commercial property: Maybe it’s a bargain, and maybe it isn’t

Have you noticed a vacant lot that’s overgrown and neglected? You may be able to buy it by tracking down the owner through your county’s tax records. You’ll be able to check its zoning status at the same time.

  • If the land is zoned commercial and the owner is interested in selling, you may have a chance to purchase a bargain.
  • Before making an offer, be sure to consider the land’s proximity to possible new development.
  • You’ll need to compare the benefit of a low price to the possible investment outcomes and if they match your expectations.

Now that you’re familiar with zoning ordinances, it’s time to look at an equally important factor: location.

Buying commercial property: Choosing prime locations for land investments

Since land in all but the most remote areas is in limited supply, this is where your search should begin. Look for acreage near or in the direction of expansion. Whether the expansion is residential, retail, or industrial, look for land in the same or neighboring areas.

For example, if a city is expanding, there may be some prime opportunities for land investment. Such as the case with Austin, Texas, an expanding city where land opportunities outside the Austin metropolitan area might be prime for investment. 

This is when it’s a smart idea to work with a broker who specializes in commercial real estate expansion. Chances are, the broker will know about planned new development months ahead of local media or press.

Once you’ve located the ideal commercial land and finalized your purchase, you have several options for possible income. One is to lease it.

Ground leases and other options

If a developer wants to build on your commercial land but doesn’t plan to buy it, you can prepare a contract for a ground lease. Here’s how it works.

  • You, the owner, sign a lease with the developer. Generally, these are much longer than others and may be for as long as 99 years.
  • Your tenant pays rent to you. Depending on the contract, developers may retain the right to build and operate one or more businesses on your land.
  • Taxes, insurance, development permits, and other costs are paid by your tenant, the developer.

Since most commercial contracts are complex, this is another reason to locate a broker or attorney who specializes in commercial land transactions.

Buying land has been a lucrative investment strategy for hundreds of years. Over 100 years ago, author and humorist Mark Twain recognized its value by his remark: “Buy land. They’re not making it anymore.”

Investing in commercial land, either to lease to a developer or as a long-term holding, can be a low-maintenance strategy to diversify your portfolio. To ensure you make the best choice, we encourage you to find a broker who understands your financial outlook and will help you locate the ideal land.

Top photo by Pär Pärsson/Unsplash

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