Buying Commercial Real Estate: A Buyer's Guide for Owners and Investors
Buying commercial real estate is different from buying a home. The price is based on the income the building produces, the financing works differently, and the leases you inherit matter as much as the building. This guide walks through how to purchase commercial real estate, from deciding what to buy to closing. It is written for owners and investors who are buying one to five properties in the northwest Chicago suburbs, which is the client we know best.
This guide is general information. It is not legal, tax or financing advice, so involve your attorney and accountant early.
Step 1: define what you are buying and why
Start with the goal. Are you buying a building for your own business (an owner-user), or an investment that you will lease to tenants? The answer changes everything else, from property type to financing.
Write down a short buy box:
Property type. Retail, office or industrial, and the sub-type, such as a strip center, medical office or flex building.
Location. The cities or corridors you will consider, and how far you will travel to manage the asset.
Size and price range. Building size, your total budget and how much cash you can commit.
Income expectations. The return you need, and how much vacancy or lease-up work you are willing to take on.
Your role. Whether you will manage the property yourself or hire a manager.
Step 2: understand the main property types
Retail. Storefronts, strip centers and mixed-use buildings. Income depends on tenant mix, visibility, parking and lease terms. See our retail property management page for how retail buildings are run.
Office. Small and mid-size office and medical office. Income depends on tenant quality, lease length and building condition.
Industrial. Flex, warehouse and light industrial. Income depends on location, building features and tenant needs.
Step 3: learn the numbers that drive value
Most investment property is valued mainly on its income. These are the terms you will hear:
Net operating income (NOI). Annual income from the property minus operating expenses, before debt payments and income taxes.
Cap rate. NOI divided by price. It is one way to compare the income return of different properties. It does not account for financing, taxes or future rent changes.
Occupancy and lease rollover. How much space is leased and when leases expire. Many leases ending in the same year can change the risk.
Lease type. In a triple net (NNN) lease the tenant pays base rent plus a share of taxes, insurance and common area maintenance. In a gross lease the landlord covers most expenses. The lease type changes how you calculate NOI.
A broker opinion of value shows how these factors apply to a specific building.
Step 4: find the property
Properties come from listings and from off-market conversations. We search for properties that meet your buy box, review listings on LoopNet and Crexi, and also source off-market opportunities for buyers by prospecting directly to landlords and sellers.
Step 5: underwrite before you offer
Underwriting means testing the numbers before you commit. We review:
the rent roll, leases and lease expirations;
operating expenses compared with what is typical for the property type;
reserves for roof, parking lot, HVAC and other capital items;
what the property would earn if vacant space were leased or below-market rents were adjusted at renewal.
The goal is to understand what you are really buying, not only the asking price.
Step 6: make an offer and negotiate
An offer is usually a letter of intent or a draft purchase agreement. It covers price, deposit, due diligence period, financing terms, closing date and which party pays which costs. Your attorney should review the contract before you sign. We prepare offers and negotiate price and terms on your behalf.
Step 7: complete due diligence
Due diligence is the period when you verify what the seller told you. Typical items:
Leases and tenant records. Confirm every lease, amendment, deposit and any tenant estoppel (a signed statement from the tenant confirming lease terms).
Financials. Compare income and expense statements with bank records and tax bills.
Title and survey. Confirm ownership, easements and boundaries.
Physical inspection. Roof, structure, mechanical systems, parking and drainage.
Environmental. Consider an environmental assessment, especially for industrial and former gas-station or dry-cleaner sites.
Zoning and permits. Confirm that the current use is allowed and that permits are in order.
Your attorney and other professionals lead many of these items. We help manage documents, inspections and questions on both sides.
Step 8: close and plan the transition
At closing, funds move, title transfers and you take over the leases. Before closing, plan how the building will be run: who collects rent, who handles maintenance calls, which vendors continue and how tenants will be notified. Because we also provide commercial property management, the team that helped you buy can run the building afterward.
Step 9: after the purchase
A good first year focuses on tenant retention, accurate expense reconciliations, preventive maintenance and a plan for any vacancy. If you later decide to lease space or sell, see our commercial leasing and commercial real estate sales pages.
Common mistakes first-time commercial buyers make
Buying on the asking cap rate. The seller's numbers are a starting point. Verify income and expenses yourself.
Ignoring lease expirations. A building that looks full can lose several tenants in the same year.
Skipping the reserve. Roofs, parking lots and mechanical systems are expensive, and the cost is yours after closing.
Having no management plan. Decide before closing who runs the building and how tenants will be handled.
Local markets
Our city pages include local market information for retail, office and industrial property:
Glenview, Mount Prospect, Arlington Heights, Elk Grove Village and Schaumburg.
Talk to us before you make an offer
Call (847) 868-5745 or contact us with your buying criteria or a property you are considering. Mon-Fri 8am-5pm, Sat 9am-12pm.
Chris Demas, MBA, CCIM, Designated Managing Broker
Leading Edge Realty Advisors, 2516 Waukegan Rd #308, Glenview, IL 60025
Illinois license 471.019127
Frequently Asked Questions
How do I purchase commercial real estate?
Define what you want to buy, line up financing, find a property, underwrite it, make an offer, complete due diligence and close. This guide covers each step. We represent buyers through the whole process.
What is the difference between buying commercial real estate and a house?
Commercial property is valued mainly on the income it produces, financing is based on the property's income as well as your finances, and you take over existing leases and tenants. Contracts and due diligence are also more detailed.
How is commercial real estate valued?
Most investment property is valued mainly on its income. We look at net operating income, the cap rate buyers are paying for similar property, lease terms, occupancy and comparable sales.
What is a cap rate?
A cap rate is a property's annual net operating income divided by its price or value. It is one way to compare the income return of different properties. It does not account for financing, taxes or future changes in rent.
What is due diligence when buying commercial property?
Due diligence is the period after the contract is signed when you verify the lease file, financials, title and survey, physical condition, environmental risks and zoning before you are committed to close.
Can I buy commercial real estate for my own business?
Yes. Buying a building for your own business is called an owner-user purchase.
Do you represent buyers?
Yes. We help buyers define criteria, search for properties, underwrite them, negotiate offers and coordinate due diligence and closing. We also represent sellers and landlords on different transactions.
Do you help investors who own only a few properties?
Yes. Investors with one to five commercial properties are our core client.