Step-by-Step Guide to Buying Commercial Real Estate in Canada
Buying commercial real estate in Canada is a significant investment that requires careful planning, thorough research, and expert guidance. Whether you are purchasing your first investment property, acquiring space for your business, or expanding your portfolio, this guide walks you through the entire process — from defining your goals to closing the deal.
Commercial transactions are more complex than residential ones, with longer timelines, larger financial commitments, and additional due diligence requirements. Understanding each step helps you avoid costly mistakes and make confident decisions.
8 Steps to Buying Commercial Property
Define Your Investment Goals
Before searching for properties, clarify what you want to achieve. Are you looking for steady rental income, long-term appreciation, or a property for your own business? Your goals will determine the type of property, location, and financing strategy.
- Determine your investment budget and available capital
- Decide between income-producing vs owner-occupied property
- Define your target return on investment (cap rate, cash-on-cash return)
- Consider your risk tolerance and management capacity
- Set a realistic timeline for acquisition and returns
Research the Market
Commercial real estate performance varies significantly by location, property type, and economic conditions. Thorough market research helps you identify opportunities and avoid overpaying.
- Study vacancy rates and absorption trends in your target area
- Analyse comparable sales and current cap rates by property type
- Research municipal development plans and zoning changes
- Understand local economic drivers (employment, population growth, infrastructure)
- Identify emerging submarkets with growth potential
Assemble Your Professional Team
Commercial real estate transactions require specialised expertise. Build your team early — before you start making offers.
- Commercial real estate agent with local market expertise
- Commercial mortgage broker or banker with CRE experience
- Real estate lawyer specialising in commercial transactions
- Accountant familiar with commercial property taxation
- Building inspector experienced with commercial properties
- Environmental consultant for Phase I/II ESA assessments
Secure Financing Pre-Approval
Commercial financing is more complex than residential. Getting pre-approved gives you a clear budget and makes your offers more credible to sellers.
- Prepare a detailed business plan and investment summary
- Gather financial statements (personal and business, 2-3 years)
- Understand your options: conventional, CMHC-insured (multi-family), private
- Compare terms from multiple lenders (banks, credit unions, private lenders)
- Budget for 25-35% down payment plus 3-5% closing costs
Search and Evaluate Properties
With your team assembled and financing in place, begin your property search. Evaluate each opportunity against your investment criteria using objective financial metrics.
- Review MLS commercial listings and off-market opportunities
- Analyse net operating income (NOI) and capitalisation rate
- Calculate cash-on-cash return and internal rate of return (IRR)
- Assess tenant quality, lease terms, and renewal risk
- Evaluate the physical condition and remaining useful life of building systems
Make an Offer and Negotiate
Commercial offers are typically more detailed than residential ones. Your offer should include appropriate conditions to protect your interests during due diligence.
- Include conditions for financing, inspection, environmental review, and lease review
- Negotiate a sufficient due diligence period (30-60 days is standard)
- Request access to all financial records, leases, and building documentation
- Consider requesting a vendor take-back mortgage for better terms
- Negotiate representations and warranties about the property's condition
Conduct Thorough Due Diligence
This is the most critical phase. Verify every assumption about the property's financial performance, physical condition, legal status, and environmental compliance.
- Review 2-3 years of financial statements and tax returns
- Verify rent roll against actual lease agreements
- Complete Phase I Environmental Site Assessment (ESA)
- Commission a comprehensive building inspection
- Verify zoning compliance and permitted uses
- Review title, survey, and any encumbrances or easements
- Confirm property tax assessments and appeal history
Close the Transaction
Once due diligence is complete and conditions are waived, your lawyer handles the legal closing process. Ensure all documents are reviewed and funds are in place before the closing date.
- Finalise mortgage documentation and fund the down payment
- Complete title insurance and transfer documentation
- Arrange commercial property and liability insurance
- Coordinate tenant notification and lease assignment (if applicable)
- Complete a final walkthrough before closing
- Transfer utility accounts and property management contracts
Commercial vs. Residential Financing
Understanding the differences between commercial and residential financing is essential before you begin your search.
Typical Closing Costs
Budget for 3-5% of the purchase price in closing costs, in addition to your down payment. Here is a breakdown of common expenses:
For a detailed breakdown of selling costs, see our Closing Costs When Selling a House guide. For TMI calculations, visit our How to Calculate TMI guide.
Key Financial Metrics to Understand
Commercial real estate is valued based on its income potential, not comparable sales alone. Understanding these metrics is essential for evaluating any opportunity.
Capitalisation Rate (Cap Rate)
The ratio of net operating income (NOI) to purchase price. A 6% cap rate means the property generates $60,000 NOI on a $1M purchase price. Lower cap rates indicate lower risk (and lower returns); higher cap rates suggest higher risk.
Net Operating Income (NOI)
Total rental income minus operating expenses (property taxes, insurance, maintenance, management fees). NOI does not include mortgage payments or capital expenditures — it measures the property's operating performance.
Cash-on-Cash Return
The annual pre-tax cash flow divided by the total cash invested. This measures the actual return on the money you put in, accounting for mortgage payments. A strong commercial investment typically targets 8-12% cash-on-cash.
Debt Service Coverage Ratio (DSCR)
The ratio of NOI to annual debt payments. Lenders typically require a minimum DSCR of 1.25, meaning the property generates 25% more income than needed to cover mortgage payments. Higher is better.
Common Mistakes to Avoid
Financial Mistakes
- Relying on seller-provided financials without independent verification
- Underestimating capital expenditure requirements
- Not budgeting for vacancy and tenant turnover costs
- Overleveraging — taking on too much debt relative to income
Due Diligence Mistakes
- Skipping the Phase I Environmental Assessment
- Not reviewing all tenant leases in detail
- Failing to verify zoning and permitted uses
- Rushing through due diligence to meet an artificial deadline
Frequently Asked Questions
How much money do I need to buy commercial real estate in Canada?
Commercial real estate in Canada typically requires a down payment of 25% to 35% of the purchase price, compared to 5-20% for residential properties. For example, a $1M commercial property would require $250,000 to $350,000 down. In addition to the down payment, you will need funds for closing costs (typically 3-5% of purchase price), including land transfer tax, legal fees, appraisal fees, environmental assessments, and HST (if applicable). Lenders also want to see that the property generates sufficient income to cover debt service, usually a Debt Service Coverage Ratio (DSCR) of at least 1.25.
What types of commercial real estate can I invest in?
The main categories of commercial real estate in Canada include: office space (single-tenant or multi-tenant), retail properties (strip malls, standalone stores, shopping centres), industrial properties (warehouses, distribution centres, manufacturing facilities), multi-family residential (apartment buildings with 5+ units), mixed-use properties (combining retail/office with residential), and special-purpose properties (hotels, self-storage, medical offices). Each type has different risk profiles, financing requirements, and management needs. Industrial and multi-family properties are generally considered lower-risk investments, while retail and office carry more tenant turnover risk.
What is due diligence in commercial real estate?
Due diligence is the investigation period after your offer is accepted but before the deal becomes firm. It typically includes: reviewing financial statements and rent rolls (2-3 years minimum), Phase I Environmental Site Assessment (ESA) to check for contamination, building inspection including structural, mechanical, electrical, and roof systems, zoning and land-use compliance verification, title search and survey review, lease review for all tenants (terms, renewals, escalations), review of property taxes and TMI (taxes, maintenance, insurance), and verification of operating expenses. The due diligence period for commercial properties is typically 30-60 days — much longer than the 5-15 days common in residential transactions.
How is commercial real estate financing different from residential?
Commercial financing differs from residential in several key ways: higher down payment requirements (25-35% vs 5-20%), shorter amortisation periods (typically 15-25 years vs 25-30 years for residential), higher interest rates (usually 1-2% above residential rates), the property's income potential is weighted heavily in approval decisions, personal guarantees are often required, loans are typically reviewed and renewed every 5 years (not set for the full amortisation period), and lenders evaluate the Debt Service Coverage Ratio (DSCR) — the ratio of net operating income to total debt obligations. CMHC mortgage insurance is available for multi-family properties (5+ units) which can reduce down payment requirements.
Do I need a commercial real estate agent?
While not legally required, working with an experienced commercial real estate agent is highly recommended. Commercial transactions are significantly more complex than residential ones, involving detailed financial analysis, lease reviews, zoning verification, environmental assessments, and specialised negotiation. A good commercial agent brings market knowledge (comparable sales, cap rates, vacancy rates), access to off-market opportunities, connections to commercial lenders and lawyers, and experience navigating the unique challenges of commercial deals. Their expertise can save you from costly mistakes and help you identify opportunities you might otherwise miss.
What are the ongoing costs of owning commercial real estate?
Ongoing costs include: property taxes (which can be significantly higher than residential rates), insurance (commercial property and liability), maintenance and repairs (building systems, common areas, parking lots, landscaping), property management fees (typically 4-8% of gross rent), utilities (unless passed through to tenants via TMI), capital reserves for major repairs (roof replacement, HVAC systems, elevator maintenance), legal and accounting fees, and vacancy costs (budget for 5-10% vacancy even in strong markets). In triple-net (NNN) lease structures, many operating costs are passed through to tenants, but the landlord still bears responsibility for capital expenditures and periods of vacancy.