Purchasing commercial real estate is often one of the most important decisions a business owner will make. When making the decision to buy commercial real estate a business must first look at financial considerations. These relate to the costs of owning real estate and the potential wealth that can be created.
The first three things you should consider
1) Do I feel comfortable spending the money it takes to buy commercial real estate for my business? The costs of owning real estate includes:
- Your down payment plus all the costs and fees associated with purchasing real estate
- Your loan payments your taxes and your insurance.
- The expenses associated with maintaining your property. This would include everything from gardening to painting the property to replacing the roof.
2) Can I see my business using this real estate for at least ten years? If not could I see myself otherwise owning this property for a long time?
There are transaction costs associated with buying and selling real estate. In addition there is a real estate cycle that often lasts around ten years where prices can go up and down. Over an extended period of time real estate has been known to increase in value at a rate that is twice the amount of inflation or higher. It is important to have the ability to hold a property long enough to match the real estate cycle. This will allow you enough profits to cover the transaction expenses
3) One must take into account the other business uses for the funds spent on purchasing commercial real estate. Commercial real estate is usually purchased by businesses that do not feel that they need those funds to grow their business.
If you can afford the property without affecting your business growth and can see yourself owning the property for a long period of time, the odds are that this will be a successful investment.
There are many benefits that can come from owning commercial real estate. The five main reasons for owning commercial real estate are as follows:
Moving is a major disruption to the vast majority of businesses. When a business owns the place it operates out of the threat of being forced to move is virtually eliminated. Also when you own your own building it makes sense to spend money on improvements knowing that the benefit is going to you and not your landlord.
Also consider the cost of moving and how important is a specific location important to your business. If the cost of moving is high or the location of the business is important to your success I would advise you to be more aggressive in purchasing the property that your business occupies.
Opportunity for Appreciation
Let’s be clear “appreciation is not guaranteed”. However for the vast majority of properties that are well maintained and are in areas of increasing economic activity there is potential for significant appreciation over time. A property that appreciates at the rate of 5% will increase in value by 85% over twelve years.
Also the cost of renting real estate has been known to go up at a rate that roughly tracks the cost of real estate. Often your total monthly payments and costs of owning your own building could less than the cost of renting the same property within ten years.
Freedom from Rent Increases
One of the major complaints that I have heard from businesses is that they build a successful company at a good location only to see a significant rent increase at the end of their lease. I have also seen many businesses forced to close due to rent increases.
A large rent increase can be particularly devastating to companies that have put a significant amount of tenant improvements into the property or feel the need to stay at or near their location for other reasons.
Remember the tighter the real estate market the larger the potential rent increase
Real estate is one of the few assets that you can use to get a loan – At least at reasonable rate. The hardest time to get a loan is when you actually need the money. Having real estate to pledge as collateral might be the difference between getting a loan and not getting one.
Most of us will retire one day. The rent that you collect from your property can make your retirement more comfortable.
The decision to buy real estate is a big one. With that in mind I will leave you with one final thought.
“We work to make our living; Wealth is created through the ownership of assets.”
If you have any questions regarding commercial real estate loans please give me a call. I am actively working on conventional commercial real estate loans and SBA loans. I have over a quarter century of experience and would be pleased to see how I could help.
Pacific West CDC