Commercial real estate owners want to know the most likely buyer of their commercial investment property. This knowledge can help the owner to strategize on the marketing of their property.
The indications below are general guidelines and specific to the San Francisco Bay Area. They are not hard and fast rules, but merely meant to help investment property owners understand to whom they will be marketing their property.
Mom & Pop/Owner User – Value Under $2 Million
Properties with a value under $2,000,000 are generally going to be purchased by “mom and pop” investors. These investors are careful, have saved, and invested wisely. They are usually local buyers that can drive to the property in a few hours time.
Other buyers at this price level tend to be small businesses that buy the property that will house the business. A business owner can build equity in a property instead of paying rent.
1031 Exchange Buyers – Properties Between $2 Million and $10 Million
Once the property crosses $2,000,000 it moves out of the range of most investors that have accumulated cash through savings alone. Most buyers in this price range receive their additional down payment from a 1031 exchange.
In a 1031 exchange or a Starker exchange, buyers have sold (or are selling) a commercial or investment property and must reinvest the funds to defer paying capital gains taxes to the government. The appreciation of their previous property over an extended period of time has allowed them to enter the transaction with a large equity portion to use as a down payment. The larger down payment allows them to purchase a larger property.
Exchange buyers have a limited amount of time to identify the replacement property and to close a transaction. It is not uncommon for an investor involved in a 1031 exchange to buy a property outside of their geographical region.
Institutional Real Estate Investors – Properties Over $10 Million
Properties over $10,000,000 begin to attract the attention of institutional investors. These investors include REITs, pension funds, real estate private equity firms, and insurance companies. These investors are very sophisticated and often have teams of analysts and acquisition personnel to analyze each individual deal.
Institutional apartment investors often require a $10,000,000 value and at least 100 units before they will consider a property.
My observations on the buyers of commercial real estate are general and apply to the San Francisco Bay Area. Which of these classifications would be different and why? Leave a comment below.
As always, if you are interested in commercial real estate investing or own investment property, please do not hesitate to call me at (925) 385-8798.