Venturing into the realm of commercial real estate can be intimidating for those new to investing. Conversations with experienced real estate agents, financial advisors, and other professionals involved in the purchasing process often lead to confusion. To navigate this complexity effectively, there are essential terms that every buyer should be familiar with to comprehend the scope of their investment and potential returns.

At American Real Estate Associates, our commitment lies in empowering our clients through education, ensuring they possess the knowledge needed to make informed investment decisions. Below we have compiled a list of six crucial terms that prospective buyers should know as they learn how to buy commercial real estate.

1. Net operating income (NOI)

When purchasing commercial property, it is important to grasp the concept of net operating income. This term represents the anticipated profit remaining after covering all the operational expenses tied to the property. These expenses encompass utilities like water and electricity but do not account for property taxes or mortgage costs if the property is financed. Understanding your net operating income makes it possible to set aside funds for future renovations or repairs and calculate your earnings.

2. Vacancy rate

If you are thinking about purchasing commercial real estate with the intention of renting or leasing it to tenants, understanding the projected vacancy rate is crucial. Our team at AREA specializes in multi-family investment properties and possesses extensive knowledge about how different factors in the real estate market impact unit vacancies. Incorporating these figures into your financial planning is essential for a well-informed investment approach.

3. Zoning

Considering the intended purpose of the property you are planning to purchase, it is crucial to investigate the zoning regulations in the area. Zoning involves a legal framework that designates specific land parcels for particular uses, such as commercial businesses or primary residences. If you have specific intentions for your property, it is imperative to verify that the zoning aligns with your plans.

4. Triple net lease (NNN)

A triple net lease is a contract between a tenant and a property owner, wherein the tenant is not only responsible for rent but also for covering all additional expenses linked to the property. These expenses encompass property taxes, insurance, maintenance, and other related costs. Property owners should acquaint themselves with the array of lease agreements accessible to identify an appropriate choice aligned with their requirements. This knowledge aids property owners in selecting the most fitting lease arrangement for their circumstances.

5. Gross lease

A gross lease represents an alternative arrangement between a tenant and landlord, differing from a triple net lease, in which the property owner retains the obligation for covering operational expenses. Within this lease structure, the tenant's sole responsibility lies in rent payment, while the property owner assumes the operating cost burden. This type of lease simplifies financial responsibilities for the tenant and ensures that the property owner covers ongoing property expenses.

6. Due diligence

You might be familiar with the term "due diligence" in various contexts, but its significance in commercial real estate is distinct and important for buyers to grasp. Within this field, due diligence signifies the responsibility of property buyers to conduct thorough research prior to completing a purchase. This encompasses tasks like arranging building inspections, examining legal documents, and more. Hiring a trustworthy real estate agent can help new buyers avoid overlooking crucial steps during the due diligence process.

Would you like to know more about how to buy commercial real estate? Our team of seasoned agents is here to provide expert guidance, helping you navigate the path to lucrative investments and gaining a comprehensive understanding of the industry landscape. Request a consultation to explore your options.