Interested in commercial real estate; can you give me a rundown for my questions?
I've been doing traditional real estate investing for a while, and own quite a few now, but it's getting harder to get real estate loans on future acquisitions.  Also, managing tenants can be its own unique brand of pain.

I am curious about commercial properties.  A few local investors who own commercial properties *rave* about them; they say it takes far less work once you get, say, a restaurant or business in your commercial property.

Now, I've looked at commercial real estate websites, and they usually sell around an 8% cap rate.  I'm not really someone to buy at retail; I always buy houses way undervalue and fix them up.  (I've flipped some, others I've refinanced to get my cash back out and set up as rentals.)

I'm interested in digging around for commercial properties: But I don't know nearly as much as I probably should.  I'm sure learning to value them will come with experience, but...how does a typical commercial property lease even work?

For example: If I own a commercial property, and someone wants to set up a restaurant, how is that structured?  Do *I* remodel the building to fit his needs?  Do I leave the building a blank slate and let the restaurant do it?  And, how do commercial building owners find clients?

Right now, I've noticed a commercial property that looks like it was once used as a mechanic shop in an area that has recently gotten a fair amount of development nearby.  It's been shut down for years.  I tracked down the owner, who lives in another city and holds it under a LLC.  I was thinking of contacting him and offering him a lowball offer for it.  I think it's a decent location for a restaurant or shop,  especially nicely set up (nice big parking lot), and many might even like using a converted mechanic shop for a restaurant.  It's tax assessed at $100k value.

What pitfalls should I worry about with something like that?  Any tips towards analyzing value?
[{"id": "cw9d1fx", "text": "In your example, the first red flag I see is the environmental condition of the property. It can be difficult to be approved for a restaurant with soil and groundwater contamination. \n\nThe biggest thing to understand about commercial is that you can't personally do as much as you can in residential. You'll need to rely on brokers to confirm pricing, draft offers, etc. Environmental consultants to complete Phase I. Contractors for internal build out bids. RE Attorneys to draft agreements and leases. It also takes relationships with lendors to get financing needed for these types of projects. If I were in your shoes I'd look for smaller commercial \"flips\" that can be improved and reused. Go talk to a commercial broker about what is available in the value-add market. If you have the money, some one can help you.   ", "replies": [], "depth": 1}, {"id": "cw9fpq5", "text": "ChrisB has it right. I will add my two cents worth. When commercial properties go vacant, they can be vacant a long time, make sure you have reserves to cover that. Commercial buildout is more expensive than residential, be prepared for that. Zoning laws can be a real stumbling block; be sure the city is totally on board with your plans before you buy. Get their approval in writing (they usually have a form letter for this once you are approved). The fire department is going to have a lot of requirements and that can get expensive. Be sure you understand that component of the deal.", "replies": [], "depth": 1}, {"id": "cwaboej", "text": "I work for a company that specializes in commercial (primarily retail, both shopping centers and single tenant) and here are my responses to your questions:\n\n&gt;how does a typical commercial property lease even work?\n\nIt depends on the type of commercial.  Most retail leases are NNN (\"triple net\") where the tenant is responsible for paying costs of operating and upkeep of the property.  For single tenant properties, often times this includes certain capital improvements including the parking lot and roof, but it may depend on the way the lease is negotiated.  (I won't go into other types of leases here, i.e. office, just yet.)\n\n&gt; If I own a commercial property, and someone wants to set up a restaurant, how is that structured? Do I remodel the building to fit his needs? Do I leave the building a blank slate and let the restaurant do it?\n\nI've seen it different ways.  Either you can do the work or the restaurant can.  Regardless, there's usually a \"tenant improvement allowance\" that is granted from landlord to tenant whereby the landlord agrees to contribute a certain dollar per square foot amount to help with the build out.  If you do the work, it could be the part of work that you do (e.g. building out to a vanilla shell or cold shell, etc.).  If the tenant does the work, you would then give them an amount to offset the cost of the work they've done.\n\n&gt;And, how do commercial building owners find clients?\n\nTypically through leasing brokers.\n\n&gt;What pitfalls should I worry about with something like that? Any tips towards analyzing value?\n\nThe other posters have picked up some of the biggest obstacles in your plan.  Former mechanic shops and old laundromats often end up having environmental contamination that need to be remediated before another tenant or use can be put into play.  Getting a Phase I environmental study done is a must with any commercial deal.  The ones I've been getting usually run between $1-2K.\n\nAlso, zoning laws may prohibit you from putting a restaurant in the property if the city prohibits it in its general or specific plan.  I'd check with the city planners or zoning dept. to see what uses are allowed.  If a restaurant isn't a permitted use, you could see how arduous it is to get approvals for a restaurant, whether you need a full blown zoning change or if you could get by with a conditional use permit.\n\nAlso, in retail we sometimes say we're not in the business of retail real estate, we're in the business of parking.  Parking often dictates how much rentable square feet you have.  The city will have parking requirements.  For example, the city you're looking at may require that a full service restaurant has something like 10 stalls per 1,000 square feet of leasable area.  If you have a 2,000 sf building, you are required to have at least 20 parking spaces.\n\nI also won't get into the nuances of valuation here.  A lot depends on your strategy of long-term hold vs. flip.", "replies": [], "depth": 1}, {"id": "cwr5zi9", "text": "Everybody is stating the downsides, however there are many upsides as well. In residential your leases will usually be a max of one year. In commercial once you get a tenant the leases can be 3-5 years long. Once they've established their business in a certain location they like staying there for a long time. Also, in many leases there are rent escalations built into the contract. Say you have a 5 year lease with a tenant with 6% escalations. Every year their lease will increase by 6%. Also for NNN leases in most cases you pay for absolutely nothing, the tenant is responsible for property taxes, maintenance, insurance, and utilities. Once you get a lease going it can definitely solve a lot of headaches that you would have with residential.", "replies": [], "depth": 1}]