Investing in Commercial Property for Sale in Columbus, Ohio? The Complete Beginner’s Guide! Tuesday, May 15, 2018
Are you a newcomer to buying commercial property for sale in Columbus, Ohio? Welcome to our thriving community! Not only is our neighborhood home to some of the largest U.S. retail and restaurant headquarters, but the Columbus, OH real estate and job markets have seen remarkable growth, too. As such, there is no better time than now to seek out commercial real estate in Columbus, Ohio.
Now that we’ve piqued your interest in our fantastic city, it’s time to dive into commercial property investment. Regardless of whether this is your first purchase or tenth, investing in commercial properties for sale comes with a unique set of challenges. So, with that thought in mind, we’ve created a comprehensive guide listing the top 5 tips for beginners, as well as a due diligence checklist, along with a list of pitfalls to avoid during the process. Also, find out what benefits the new tax bill brought to the commercial real estate industry, particularly for Ohio investors; these benefits might motivate you to make that buy decision quicker than you thought!
The Upside (and Downside) of Buying Commercial Property for Sale in Columbus, Ohio
As with homes and vehicles, there are pros and cons to buying commercial real estate. For a business owner or investor looking for a long-term property, buying tends to be the best choice; however, it does come with its own set of risks. Naturally, as the owner, you are not only responsible for repairs and maintenance, but also the health and safety of the occupants. Additionally, purchasing commercial property for sale may include significant upfront costs to bring the building up to code, adhere to environmental regulations, or secure a loan or line of credit.
Nonetheless, there is a significant upside to ownership. Your property is an incredible asset with potential for increased equity and appreciation. In Columbus, many commercial real estate owners are excited when asking the question, “What’s my commercial property worth?”
Consider this: According to Crain’s Chicago Business, Columbus saw the most substantial increase in total home value in the country. That’s great news for commercial real estate, which traditionally follows the residential market trends. In addition to the prospect of skyrocketing property values, buying commercial property for sale gives you control of the property and allows you to dictate usage, rental agreements, and types of tenants.
Make Sure Your Commercial Real Estate Investment Pays Off with 5 Tips
If you are entering the world of CRE investment and purchasing commercial property for sale in Columbus, Ohio for the first time, remember three letters: ROI. Having free reign over a property to call your own can be exciting; however, ownership can quickly lose its allure with real estate sinking in value. If “Less than what I paid.” was your answer to, “What’s my commercial property worth?” then you probably need to rethink your strategy.
With the Small Business & Entrepreneurship Council naming Ohio as one of the top 10 most entrepreneur-friendly states, Columbus is a great place to invest. That said, avoid the “doomsday” scenario and consider the following five tips before you invest in Columbus real estate.
Tip #1: Ensure the area suits your needs.
For first-time investors entering the commercial real estate world, start your property search in communities you are familiar with. Many investors start out by purchasing commercial property available in the same area in which they reside because of the natural familiarity. Exposure to a specific region or city eliminates much of the research required; this typically involves knowing the general population, main attractions, and major employers within the area. If you’re conducting a Columbus, Ohio property search, you may uncover the following aspects about our great community:
- General population: Columbus has a population of 860,090 and Columbus Metro has 2,078,725.
- Main attractions: Columbus Zoo and Aquarium, COSI, Franklin Park Conservatory and Botanical Gardens, North Market, and Columbus Museum of Art are among the most popular attractions.
- Major employers: The Ohio State University, The State of Ohio, JPMorgan Chase, OhioHealth, and Nationwide are some of the top employers.
Having a keen sense of these factors off the bat helps property or land buyers determine the predicted economic atmosphere within the coming years. If, however, the current neighborhood does not appear to be optimal for a commercial real estate investment, perform necessary research; you may find out that it’s more ideal to invest elsewhere.
Ohio has much to offer prospective investors, ranking in the top 10 on Chief Executive magazine’s “2018 Best & Worst States For Business.” Our state also ranked in the top half for states with the best taxation and regulation, workforce quality, and living environment; thus, making Ohio extremely attractive to large enterprises, startup firms, and home buyers alike.
As far as Columbus, Ohio is concerned, population growth has catapulted the city past Indianapolis to rank 14th in the country. And, Columbus leads other Midwest cities by having excellent job creation and momentum, according to Forbes’ “2018 Best Cities for Jobs.”
So, when you are considering a location for commercial real estate investment, make sure you take into account some of the economic indicators above. Here are some questions to help you better assess the area in which you’re looking to invest:
- What is the commercial real estate market climate? (Is it growing, stable, or declining?)
- What is the rentability of the area?
- How is the current job market? What industries are strong in the community?
- What are the prospects for the area? (For instance, what is the cost of living?)
Tip #2: Determine your capitalization (or “cap”) rate.
As a novice in the purchase of commercial property for sale in Columbus, Ohio, the cap rate of a property is a critical element. Fundamentally, the cap rate is the relationship between the property’s net income with the property’s purchase price. For CRE investors, the cap rate is a way to determine the property’s ROI potential.
Commercial real estate appraisers will tell you that cap rates do not signify value. The basic equation for determining your cap rate consists of taking the annual rent of the commercial property and subtracting all yearly expenses (such as maintenance, management, and utilities). Cost of vacancy (which is basically the amount of time in which the property may not be fully occupied, resulting in lower or zero cash flow), should also be factored in as an expense. Once net income is determined, it is then divided by the purchase price.
Realtor.com describes optimal cap rate percentages as being between 4 percent and 12 percent. It is worth noting that commercial properties available with high percentages (over 12 percent) can be as risky as those with low percentages (below 4 percent); therefore, it is essential to look at a set of factors instead of the cap rate, alone.
Tip #3: Decide on your role.
“Management” isn’t just a line item expense; it is a critical part of the profitability of your Columbus, Ohio commercial real estate. As such, you must determine how involved you will be in the day-to-day administration of your property.
If you are purchasing the commercial property for your business purposes, you must be prepared to keep that space occupied. The mortgage payments, utility fees, and maintenance costs are all on your shoulders. On the other hand, if you are purchasing the commercial property for leasing to tenants, you have two choices when it comes to running the show. You can choose to act as the landlord, handling the typical day-to-day responsibilities; or you can consider hiring a commercial property manager who will administrate those aspects for you.
For first time buyers, hiring a property manager is recommended. It takes work in the beginning to find the right person to manage your investment. And, while it is an extra cost, having a property manager can make ownership less stressful. When searching for property managers in Columbus, Ohio, personality and experience are essential. Other criteria include ensuring that you’re both on the same page with how to screen tenants, collect rent, handle evictions, perform maintenance, and successfully market any vacancies within the property.
Tip #4: Avoid fundamental mistakes.
As a buyer of Columbus, Ohio commercial real estate for sale, you might come across the term “balance sheet” in your research. The balance sheet discusses the state of the property as a whole; not just the level of cash flow, but also the appreciation, equity growth, and tax benefits. Failure to address all four of these topics can result in poor utilization of your asset, as well as hinder profits.
Another mistake – perhaps one of the more obvious (and, consequently, most detrimental) mistakes – is contracting the commercial property for sale in your personal name. From a risk management perspective, if for whatever reason the purchase eventually goes downhill, your private assets (e.g., retirement accounts) can be included as fair game in a lawsuit. To prevent this situation, purchasing a property with a business name, such as a limited liability company (LLC), is highly recommended. Consult a commercial real estate attorney before establishing a business entity.
Tip #5: Hire a professional Ohio real estate appraiser to assess the commercial property for sale before signing.
In addition to hiring an attorney, assemble a team of experts, particularly professional commercial property appraisers to assess the property prior to signing. A recent change by the U.S. Department of the Treasury increased the threshold for requiring an appraisal when obtaining financing for a commercial property for sale. Essentially, buyers or investors are no longer required to necessitate a certified appraisal for properties under $500,000 (compared to $250,000 previously). Despite the new ruling, commercial appraisals performed by experienced, certified real estate appraisers offer an important and comprehensive analysis; not only of your property but also the surrounding area.
A Columbus, Ohio property appraiser will help you learn the exact size and condition of the property. They will also demonstrate how your property compares with others, which will assist you in determining your purchase price.
The importance of commercial real estate appraisals was exemplified by the recent statewide reassessment conducted by various counties in Ohio. Franklin County, which includes Columbus, underwent the property reassessment process in 2017. Many property owners were surprised by the subsequent tax increase determined by the County Auditor’s Office. If not for the in-depth work of independent commercial real estate appraisers in challenging the updated tax burden of their clients, the property owner, many would be unnecessarily paying increased taxes.
To summarize, it is recommended that an investor obtain a commercial appraisal no matter what the guidance is from the U.S. Department of the Treasury.
Due Diligence Checklist: A Newbie (or Seasoned) Investor’s Best Friend
During the real estate due diligence process, a responsible CRE investor will spend weeks scrupulously inspecting all aspects of the commercial property for sale. They must ensure that there are minimal or zero surprises post-purchase. As such, investors must verify the seller, financials, and property obligations (i.e., zoning).
Many commercial property investors don’t realize that they also have the opportunity to request that the due diligence period begins after the seller provides each necessary piece of information. Seasoned commercial property investors know that money need not be spent until after performing their review.
Abiding by the checklist, below, will guide you in the process; thus, ensuring that each document, record, regulation, and financial information does not go unnoticed.
As you embark on your purchase of commercial property for sale in Columbus, Ohio, you must obtain, request, or perform the following:
- All documentation from the seller, including the financials and title policy
- The most recent topographic study and/or ALTA (American Land Title Association) survey of the commercial property
- An in-person tour of the commercial real estate for sale with a property or listing manager
- The property’s Zoning Compliance Certificate, ensuring that zoning qualifications are met
- Comprehensive environmental reports on the commercial property, including NFR (No Further Remediation) letters, appraisals, and any soil, mold, termite, or radon testing
- Written certification ensuring that there are no other current leases – oral or otherwise, as well as complete documentation of each written lease
- If applicable, a full survey of rent and other income paid by the property’s tenants; this can include any delinquencies, security deposits, lease commencement and termination dates, and years of occupancy
- Three years’ worth of the commercial property’s income and expense records; these items include tax statements, real estate tax bills, and other related documentation, as well as any protests
- A full accounting of each service performed on the commercial property, pertaining to maintenance, operation, and repair
- A record of insurance information, including existing policies and any pending or previous claims made against the commercial property
- Legal documentation pertaining to the commercial property for sale in Columbus, Ohio; pending litigation (if any) that may affect the sale of the property should also be provided
The 6 Most Common Mistakes When Performing Commercial Real Estate Due Diligence
Following the above checklist doesn’t absolve you from making errors in the due diligence process. As such, awareness of these six potential issues is critical to success:
- Missing the mark with commercial property value. As noted within the beginner tips above, valuation of a property is a fundamental step in commercial real estate investment. It is also where most errors often occur. Property valuation may fluctuate throughout the entire process – from when you begin your commercial property search, to when you accumulate information on comparable sales in the area, then as you start performing due diligence.
- Not meeting your lender’s loan requirements. For commercial real estate loans, many lenders base loan amounts on criteria such as: (1) the purchaser’s credit; (2) physical condition of the property, both the interior and exterior; (3) comparable commercial properties for lease and commercial properties for sale in Columbus, Ohio (or wherever the property is located); (4) intended use; and (5) potential environmental issues. Detailed communication with the lender before proceeding with due diligence is vital in avoiding wasted time.
- Failing to confirm the commercial property’s compliance with building codes and regulations. It is common practice for a commercial real estate investor to wait until contracting starts or a visit from a city inspector comes to check the work being done, before reviewing the building codes. Of course, this is all after the property has been purchased, creating easily avoidable problems for the purchaser. By following the checklist above, you will ensure full knowledge of your commercial property’s building codes.
- Lacking full awareness of existing tenant lease provisions. Another checklist item, obtaining existing lease agreements is of high importance. Specialty lease provisions can include contracts, cancellations, and fixed rents. Problems arise when tenants try to act on these provisions while the purchaser is unaware of the legalities.
- Assuming the seller has provided full disclosure of any issues regarding the commercial property. A good commercial real estate investment cannot rely solely on trust. The due diligence process is the time where the purchaser needs to ask all pertinent questions and obtain written documentation in response.
- Skimping out of the physical inspection. The purchaser should visit the property in question multiple times. Even if the seller claims they want to avoid tenant disruption, you, as the purchaser, should insist on performing a walk-through of every unit on the property. Try to speak directly with the tenants, too. Also, visit the property on various days and at different times during the day. In doing so, you will get an accurate feel for how the property is viewed and used; you will also understand the general condition of the units.
How the 2017 Tax Cuts and Jobs Act Affects You and Your Commercial Real Estate
The 2017 Tax Cuts and Jobs Act, also known as Public Law No. 115-97, was signed on December 22, 2017. This act has since become the most transforming federal tax law implemented in the U.S. in decades. Fortunately, many aspects of the new law will impact those investing in commercial property for sale in Columbus, Ohio (and throughout Ohio) in a positive way. The new bill has proven that there will be tax savings over both the long- and short-term. Outlined below are the significant instances of the new tax law’s effects.
- 20 Percent deduction. This provision benefits real estate investors who hold property in companies registered as partnerships, LLCs, and S Corps. The new law permits investors and shareholders to take advantage of a 20 percent tax deduction on that income. While there are exceptions to this rule, a tax advisor will be able to assess your specific situation and guide you accordingly.
- Increase of Section 179 expense cap. Under Section 179, taxpayers can deduct costs of certain properties as expenses, creating a reduction in the overall tax bill. The new law has doubled the cap amount, which was previously set at $500,000, but is now $1,000,000. This law aims to encourage investors to purchase more commercial properties for sale.
- 1031 Exchanges. The new tax law has preserved the ability to defer capital gains on real property alone, as opposed to also including value on personal property. Luckily, for commercial real estate investors, this means that capital gains on the sale of a commercial property can be deferred so long as they are reinvested into another commercial property that fits the qualifications.
- Immediate cost recovery. A commercial real estate investor who acquires a new asset now can take a full property deduction within the same year. The law previously permitted commercial real estate investors to deduct 50 percent of a property’s cost in the first year of purchase, and then continued depreciation in the subsequent years.
For residents and workers in Columbus and throughout Ohio, the results of the tax reform bill have been highlighted by businesses offering higher wages, bonuses, and increased benefits. Investors in commercial property for sale in Columbus, Ohio have also seen opportunities to generate profit while assisting areas deemed “Qualified Opportunity Zones.” Essentially, the new law provides incentives to investors who purchase distressed census tracts (or properties) in low-income communities. The Governor of Ohio, John Kasich, recently announced that there are 320 census tracts awaiting approval from the U.S. Department of Treasury. Of the 320 properties, 44 are said to be located in Columbus, Ohio. Once certified, investors can capitalize on incentives, which include a deferment or elimination on gains from stock or property.
Ready to Embark on Your Investment Journey? Commercial Property for Sale in Columbus, Ohio Awaits!
Having read all the tips and information above, we’re confident that you’re ready to purchase a commercial property for sale. That said, it’s best to partner with an experienced commercial real estate firm to ensure you make the best decision.
With 80 years in the Columbus, Ohio commercial real estate market, The Robert Weiler Company offers a comprehensive suite of services, including brokerage, consulting, development, appraisal, and property management. What more can you ask for when investing in commercial property for sale in Columbus, Ohio? Contact us at 614-221-4286 to begin forging your pathway to CRE success!