Whether you are a business owner who is currently leasing and want to own, or you are a residential property owner looking to expand your opportunities, purchasing commercial property may be an option for you. As with any significant financial decision, it is important to educate yourself and learn as much as you can. There is no substitute for the guidance of a group of knowledgeable professionals—including an experienced mortgage broker to help you get the best mortgage rates in Calgary.
The Advantages of Owning Commercial Property
Purchasing a commercial property is a great investment that can help you reduce your overall risk. If you have ever been a landlord and had a tenant move out suddenly, you understand the urgent need to fill that vacancy before it takes a bite out of your income. With a commercial property, one tenant is just a part of the overall picture. If your building has space for five tenants and one leaves, you have only reduced your income from that property by 20 per cent, not 100. This also gives you the potential for higher cash flow, and since commercial leases are typically longer than residential ones, your income will be more stable.
Learning to correctly judge a property can make the difference between an educated guess and a wise choice. When evaluating a property, be sure to consider these factors:
- Net operating income (NOI) of a commercial property is reached by adding up the first year’s expected gross income and subtracting operating expenses. Obviously, you want to purchase a property where the NOI will be a positive result.
- Capitalization (or cap) rate is how you determine the value of a property. This is the rate of return you can expect based on the income the property generates. To calculate the cap rate, divide the income by the value of the property.
- Cash on cash is another way of considering a property’s rate of return. Even if you get the best mortgage rates in Calgary, some of the net operating income will go toward making your mortgage payments. Cash on cash is determined by dividing the annual income by your total investment.
Don’t Work Alone
Surround yourself with a team of experts. When you pool the skills of a group, you can rest assured that you are making the most informed decision. Your team should include:
- An accountant that will assist you in determining what you can afford as well as analyzing the operating budget and tax benefits.
- A lawyer to help you complete the transaction.
- A commercial broker to assist with finding the right property for your budget.
A mortgage broker like Mortgages by Candice who works with multiple lenders and can get you the best mortgage rates in Calgary. There are many financing options available for commercial mortgages, and a mortgage broker is your best bet for selecting a mortgage that suits your needs best.
Choosing the Right Property
It’s not just about location. Neighborhoods change and markets change with them. Smart commercial investors consider the larger picture. Learn about a property’s vacancy rates. Talk to the tenants. What do they like and dislike about their location and the current management? Find out if big name companies are moving into the area that could drive up the property’s appeal to smaller businesses. Does it have adequate parking? Are there other upgrades or improvements that will have to be made in the next year or two? You want to have as much information as possible to help you make an informed decision before you even make an offer.
The Mortgage Broker’s Role
After selecting a property, your next step is to meet with your mortgage broker to discuss today’s rates and financing options. Whether you are thinking about a multi-residential property, an office, retail, or industrial space, brokers have access to a variety of products from different lenders, so you have a better chance of getting the best mortgage rates in Calgary than you would by obtaining financing through your regular bank. Commercial mortgages are usually for five years unless the property is CMHC insured, in which case you can apply for a ten-year mortgage. As with residential properties, the interest rate on commercial loans may be variable or fixed. Your mortgage broker can help you select a product that will meet your goals for the future.
Purchasing a commercial property is a great way to grow your business. If you have decided the advantages of owning a commercial property fit in with your financial goals, take the time to learn how to carefully evaluate the opportunities a property presents and build a team of professionals to guide you through the process. Contact Mortgages by Candice today to find out more.