Commercial real estate investing: how to buy, own and sell

You invest in commercial real estate by buying an income property yourself, by joining other investors in a partnership or fund, or by buying shares of a real estate investment trust (REIT). The three routes differ in the cash they take, the control you keep and how easily you can sell.

Commercial real estate is property held to earn income: offices, shops, warehouses, hotels and apartment buildings. An investor earns the rent left after operating costs, called net operating income (NOI), plus any rise in the building's price.

No. The US Securities and Exchange Commission (SEC) defines a REIT as "a company that owns and typically operates income-producing real estate or related assets". A listed REIT's share is a security whose price moves with the stock market every trading day. A building's value moves with its rent and with the prices paid for similar buildings. Non-traded REITs "generally cannot be sold readily on the open market", and their sales commissions and upfront offering fees "usually total approximately 9 to 10 percent of the investment" (Investor.gov).

A syndication pools money from several investors to buy one property. The sponsor, also called the general partner, finds the building, arranges the loan and manages the investment. The limited partners supply most of the cash and share the income under a written agreement. The sponsor earns fees and a share of the profit above an agreed return. An interest in a syndication is usually a security, so securities law decides how a sponsor may offer it.

Sponsors find investors among people who already know them: past partners, clients, and the contacts of their lawyers, accountants and brokers. Securities law is the reason. In the United States, many sponsors rely on the SEC's Rule 506(b). It lets a company raise an unlimited amount of money from an unlimited number of accredited investors, with "no general solicitation or advertising to market the securities" (SEC, Rule 506(b)).

An accredited investor passes an income test or a wealth test, and the two countries set the tests at similar levels:

The US tests come from the SEC's definition (SEC, accredited investors). The Canadian tests shown are those of Quebec's securities regulator, the Autorité des marchés financiers (AMF) (AMF, prospectus exemptions). Raising money from investors is a regulated sale in both countries, so a sponsor hires a securities lawyer before the first conversation.

Commercial real estate is a good investment for a buyer who pays a price the rent supports, borrows with a margin and can hold through a downturn. The return comes from rent and from the change in the building's price, and both can fall.

Income is the steadier half. Leases fix the rent for years, and the capitalization rate (cap rate), NOI divided by price, gives the yield at the price you pay. Our valuation guide shows how cap rates and NOI turn income into value.

Price is the volatile half. The Federal Reserve's commercial real estate price index fell 39% between the third quarter of 2007 and the fourth quarter of 2009 (FRED). It first closed above its 2007 peak in the third quarter of 2016, nine years later. From the second quarter of 2023 to the second quarter of 2025, the index fell 13%. In the second quarter of 2026 it stood 6% below its 2023 peak.

Source: Board of Governors of the Federal Reserve System, Financial Accounts of the United States (Z.1), commercial real estate price index, via FRED (series BOGZ1FL075035503Q), Q1 2000 to Q2 2026; rebased to Q3 2007 = 100.

An owner who held through those nine years saw prices return. An owner whose loan came due near the bottom had to refinance or sell into the fall. The holding period and the loan's maturity date decide which owner you are.

Risk also depends on the strategy. Investors rank deals from core, a fully leased building bought for steady income, through core-plus and value-add to opportunistic, which covers development and distressed purchases. Expected return and the chance of loss rise together along that scale.

Borrowing, also called leverage, raises the cash return only while the loan payments cost less per dollar borrowed than the building yields. Take a building priced at $2,000,000 that earns $130,000 of NOI, a 6.5% cap rate. The buyer pays cash, or puts in $700,000 and borrows $1,300,000 over 25 years. The three interest rates are assumptions:

At 4%, the cash return rises from 6.5% to 6.8%. At 5.5% and 7% it falls, because each payment covers interest plus principal, and together they cost more than the building yields. The principal repaid still builds the owner's equity, which the cash return leaves out.

The debt service coverage ratio (DSCR), NOI divided by the annual loan payments, falls with the cash flow. At 7% it reaches 1.18, under the 1.25 minimum our pillar guide uses to show how a lender sizes a commercial loan. A lender would then cut the loan and ask for more cash. A commercial mortgage calculator gives the payment at other rates and terms.

Borrowing also magnifies a price change. A 13% fall in price takes $260,000 off the $2,000,000 building. For the borrower, that loss equals 37% of the $700,000 invested.

You buy a commercial property in six steps: set your criteria and financing, find a property, sign a letter of intent, negotiate the purchase and sale agreement, complete due diligence, and close.

1. Criteria and financing. Choose the property type, the market and the price range, then ask a lender what loan the building's income would support. Our explainer on how underwriting works in real estate shows the lender's tests.
2. Search. Listings cover part of the market, and a broker who sells that property type knows the buildings that trade quietly. Our careers guide explains how to hire a commercial real estate broker.
3. Letter of intent (LOI). A short, mostly non-binding outline of the price, the deposit and the timeline.
4. Purchase and sale agreement. The binding contract, which fixes the price and the dates.
5. Due diligence. You check the leases and the rent roll against the seller's figures, inspect the building, and order the title, survey, zoning and environmental reports.
6. Closing. The lender funds the loan, the seller transfers title, and the rents and deposits pass to you.

The environmental report carries legal weight. Under the US Superfund law, liability for contamination "may be assigned based solely on property ownership" (US Environmental Protection Agency). A buyer can therefore inherit a cleanup bill for contamination it did not cause. A Phase I environmental site assessment, completed before closing, documents the inquiry that can protect the buyer.

An offering memorandum (OM) is the marketing package a seller's broker sends to buyers. It sets out the rent roll, the operating history, the market and the asking terms. Read it as the seller's case for the price, and test its income against the leases and the actual statements during due diligence.

A purchase and sale agreement (PSA) is the binding contract between the buyer and the seller. It sets the price, the deposit, the due diligence period, the seller's statements about the property and the closing date. The deposit usually stops being refundable when the due diligence period ends, so the dates in the PSA matter as much as the price.

Lenders finance part of the price, so a buyer with no cash of its own uses someone else's. Three routes are real:

• Partners' equity. In a syndication, the sponsor contributes the deal and the work, and the investors fund the down payment, the cash a buyer puts in at closing.
• Seller financing. The seller accepts part of the price as a loan that the buyer repays over time.
• An owner-occupier programme. A business buying its own premises can apply for a 504 loan, a programme of the US Small Business Administration (SBA). The borrower's contribution starts at 10% of the project cost and reaches 20% for a business in its first two years that buys a single-purpose building (13 CFR 120.910).

The 504 programme serves operating businesses: a 504 loan cannot fund "speculation or investment in rental real estate" (SBA, 504 loans). In Canada, Canada Mortgage and Housing Corporation (CMHC) insures high-ratio loans on apartment buildings, and the pillar guide linked above sets out the terms.

You sell a commercial property by assembling its financial records, pricing it on its income, marketing it to the buyers who own that kind of building, and negotiating a purchase and sale agreement.

• Assemble the records. Buyers and their lenders work from the rent roll, the leases, 12 months of operating statements and a list of recent capital work.
• Price it on income. A broker opinion of value or an appraisal converts the building's NOI into a price range.
• Pick the marketing route. A broker can list the building openly or show it quietly to a short list of buyers. The brokerage guide covers who pays the commission.
• Negotiate and close. Offers arrive as letters of intent, the PSA follows, and the buyer's due diligence and financing set the closing date.

The likeliest buyer already owns a similar building nearby, and an investment sales broker calls those owners first. Three other groups deserve a call: the building's tenants, the owners next door, and investors completing a tax-deferred exchange, who work against a deadline. The offering memorandum and the listing platforms then reach everyone else.

Both countries let an owner deduct a building's cost over time and tax the gain when the building sells, and they differ on the schedule and on deferral.

The US recovery periods come from the Internal Revenue Service (IRS Publication 946), which leaves land out "because land does not wear out, become obsolete, or get used up". The Canada Revenue Agency (CRA) sets the Canadian rates by class and states that "Land is not depreciable property" (CRA, classes of depreciable property).

Depreciation defers tax in both countries. When a US owner sells, the gain that comes from depreciation on the building, called unrecaptured section 1250 gain, "is taxed at a maximum 25% rate" (IRS Topic 409).

Cost segregation is a study that divides a building's purchase price among its parts and gives each part its own recovery period. The structure stays on the 39-year schedule. Parts the tax code treats as shorter-lived move to faster schedules, such as the 15-year class for "certain improvements made directly to land or added to it" (IRS Publication 946). The owner deducts the same total sooner, and the lower tax basis raises the taxable gain at sale.

An opportunity zone is an economically distressed area where an investment can earn a US tax incentive. An investor who moves an eligible gain into a qualified opportunity fund can "temporarily defer tax on eligible gains" (IRS, opportunity zones). The IRS issued transitional guidance on the zones in 2026, so read the current rules before you count on a deferral.

No. Under section 1031, a US taxpayer who swaps one investment property for another generally recognizes no gain at that time. The exchange stops at the border: "real property in the United States is not like-kind to real property outside the United States" (IRS, like-kind exchanges).

Canada's nearest rule lets a seller who buys a replacement property defer the capital gain and the recapture of capital cost allowance, which the CRA counts as income. It covers the voluntary sale of a property used mainly to earn business income, and the CRA's definition of that property "excludes rental property" (CRA, replacement property). A Canadian landlord who sells one rental building to buy another generally reports the gain in the year of the sale.

The commercial real estate learning centre collects the rest of this series.