Buying a Commercial Property: Smart Investment in Commercial Real Estate

The dream of owning bricks and mortar

There is something magical about owning real estate. Where shares are abstract and savings accounts currently yield hardly any return, a commercial property simply stands there. You can touch it, walk around in it, improve it. It is that tangibility that appeals to many entrepreneurs and investors when they consider buying a commercial property.

But let’s be honest: buying a commercial property is not a decision you take lightly. It often involves sums with six or seven zeros, complex contracts and risks that extend beyond just market value. In this article, I will take you through everything you need to know before you take that step – from financing to pitfalls, and from yield to future prospects.

Why own real estate?

Let me start with the question you must first ask yourself: why would you want to buy a commercial property at all? The answer is different for everyone, but there are a few universal advantages worth considering.

The most obvious advantage is freedom. No more landlord deciding what you can and cannot renovate. No rent increases putting pressure on your budget every year. No uncertainty about whether you are still welcome in five years' time. As the owner, you decide.

In addition, you build equity with every month you repay. Instead of pouring money into a landlord's pockets, you are investing in your own future. And should the value of the property rise – which has consistently happened in the Brainport region in recent years – you benefit directly.

Finally, there are the tax advantages. Depending on how you own the property (in the business or privately), you can deduct interest, depreciation and maintenance costs. It is worth involving a good tax specialist here, as the differences can be significant.

The reality of financing

Now that we've discussed the benefits, it's time for a reality check. Buying a commercial property sounds great, but how do you finance such a purchase? Because let's face it: most entrepreneurs don't have €500,000 or more sitting in their bank account.

A commercial mortgage is the most common route. Unlike with a residential house, banks finance a maximum of 70 to 80 per cent of the market value. That remaining 20 to 30 per cent – your own contribution – you must provide yourself. For a property of €800,000, you are quickly talking about €160,000 to €240,000 of your own money.

And the bank looks beyond just your bank account. They want to see that your business has existed for at least three years and has achieved positive results in recent years. A personal guarantee from the director is almost standard. Interest rates are usually 2 to 4 per cent above the base rate – considerably higher than for a residential house.

It is not a simple process, but with the right preparation and guidance, it is certainly achievable. And for those who secure the financing, the rewards await.

Due diligence: the work no one sees

This is where it gets serious. Due diligence – thorough research before you buy – is perhaps the most important part of the entire purchasing process. It is the work that no one sees, but which can save you from financial disasters.

On a technical level, you want to know what condition the building is in. What about the roof, the facade, the foundation? Are there hidden problems such as asbestos or soil contamination? What is the condition of the electrical installations and the pipes? And not unimportantly: what is the energy label, and what does it cost to improve it if necessary?

Legally, you must scrutinise the zoning plan (bestemmingsplan). Are you actually allowed to do what you intend? Are there easements or perpetual clauses (kettingbedingen) that restrict your freedom of movement? If the property is leased: what do the lease agreements look like, and what rights do the tenants have?

And then the financial side. What is the WOZ value and how much property tax (OZB) do you pay? What have historical maintenance costs been, and what investments are planned for the coming years? All this information together gives you a realistic picture of what you are actually buying.

Yield: the heart of the matter

For many buyers, the yield is the deciding factor. As an investor, you want to know what your investment returns. As an owner-occupier, you want to know if buying is more advantageous than renting. Let’s dive into the figures.

The gross initial yield (BAR) is calculated by dividing the annual rent by the purchase price and multiplying by 100. A property of €1,000,000 with an annual rent of €70,000 thus yields a BAR of 7 per cent. That sounds attractive, but it is only part of the story.

The net initial yield (NAR) takes into account the operating costs: maintenance, management, insurance, vacancy risk. Subtract those from the annual rent, and you arrive at a more realistic yield. In the current market, you see yields of 4 to 5 per cent for offices in prime locations, 6 to 8 per cent for industrial halls, and 7 to 9 per cent for retail in secondary locations.

Compare that with the 0 per cent on your savings account or the volatility of the stock market, and you understand why real estate is so popular among investors.

The pitfalls you must avoid

I would be giving you a false picture if I only highlighted the rosy side. There are plenty of examples of entrepreneurs who have burned their fingers on a commercial property purchase. Let me warn you about the most common mistakes.

The first and biggest mistake is doing too little of your own research. Yes, the seller has created beautiful brochures. Yes, the estate agent assures you it is a top location. But never trust others blindly. Do your own homework, ask critical questions, and take your time.

A second common mistake is underestimating the buyer's costs (kosten koper). Transfer tax, notary fees, estate agent commission, advisory costs – expect 8 to 10 per cent on top of the purchase price. For a property of €1,000,000, that is an extra €80,000 to €100,000. Include that in your calculations beforehand.

And don't forget your exit strategy. What if you want or need to sell in five years? How liquid is the market for this type of property? What if interest rates rise and valuations fall? These questions are not pessimistic – they are sensible.

The future of commercial real estate

Finally, I want to give you a glimpse of what is to come. The real estate market does not stand still, and today's trends determine tomorrow's value.

Flexibility is becoming increasingly important. Tenants no longer want to be tied to long-term contracts for spaces that do not grow with their business. Properties with flexible layouts and short lease terms are becoming more attractive.

Sustainability is no longer an option, but a requirement. ESG criteria (Environment, Social, Governance) are becoming increasingly important for both tenants and investors. A building with poor energy performance will be harder to let and sell.

And accessibility is evolving. Good public transport connections are gaining importance relative to parking facilities. The younger generation of employees increasingly chooses the train or bicycle over the car.

Time to act

Buying a commercial property can be one of the best decisions you make as an entrepreneur or investor. But it requires preparation, knowledge and a willingness to do your homework. With the right approach and the right guidance, you lay the foundation for years of financial success.

Want to brainstorm about the possibilities? Read our article on selling commercial property or request a valuation without obligation. The first step is often the hardest – but also the most important.