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Tips for purchasing commercial real estate

2/11/2016

24 Comments

 
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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:

Stability
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.

Retirement
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.


Bill Hand
Pacific West CDC
415-221-4263
bhand@pacwestcdc.com

24 Comments
EDcook Real Estate link
3/20/2017 05:48:14 pm

Thank you for sharing the article. It’s very useful. Hope to hear more from you.

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Millie Hue link
6/6/2018 05:35:48 pm

I totally agree when you said that owning a commercial property for your business is more practical because improving the appearance and everything on that property will make sense. Like you said, its benefits will directly go to you and not to any landlord. I will highly suggest this to my best friend who is unsure if she will buy her own property or just rent for the beauty salon that she plans to open. Thanks!

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Liam buttler link
6/8/2018 06:31:41 am

Thank you for sharing such a useful article. A lot of factor should be considered prior to buying a commercial property. Buying a commercial property means investing a huge amount of money at a single time and space. So, one should be very careful about this. Hiring professional real estate agents could make the deal smoother and profitable. Their experience and ability is really useful for the buyer of the commercial property.

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Gerty Gift link
8/1/2018 09:50:08 am

I liked what you said about being able to have freedom from rent increases. My friend has been talking about getting her own building for her business. I think that it would be a great thing for her to do so that she wouldn't have to worry about anybody raising rent or any other costs.

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Ridley link
8/27/2018 06:47:50 pm

You've got some great tips for buying commercial real estate. I like how you said that you need to find a place that is in a good location because it's key. There's a location by my parent's house that has had a dozen businesses in it because it's not in a good place, so that's important!

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Vanessa Blair link
10/9/2018 05:56:15 pm

My brother is planning to buy a commercial property and open a shop. It was explained here that he should consider the appreciation of the property when dealing with a commercial real estate. Furthermore, it's recommended to talk to a real estate expert when considering a commercial real estate.

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Jocelyn McDonald link
10/25/2018 06:50:28 am

My sister wants to start her own business, but she's having some trouble finding and purchasing a building she can base it in. Your article had some great tips for getting commercial real estate, and I liked how you said to keep in mind that the costs of owning real estate like this includes the expenses associated with maintaining the property. This includes everything from gardening to painting the property to replacing the roof, and I'll share this with my sister so she's know what to expect when buying commercial real estate.

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Jocelyn McDonald link
12/18/2018 10:41:53 am

My sister wants to start her own business, and I offered to help her buy real estate where she can base it. Your article had some great tips for getting real estate like this that my sister could use, and I liked how you said to keep in mind the cost of maintaining a property, including things like gardening, painting, or even replacing the roof. Thanks; I'll share this with my sister to help her get real estate for her future business.

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Gillian Babcock link
12/23/2018 03:38:52 pm

My sister is planning to open her own store and she's looking for a possible space. It was explained here that she should consider if space can be used for at least ten years and the insurance. Furthermore, it's recommended to consult real estate experts for quality commercial real estate services.

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Realestate link
1/29/2019 10:59:59 pm

Thanks for sharing great tips, Real estate is attractive when compared to more traditional sources of income return. As a real estate expert I prefer to invest in real estate.Everyone wants to increase lead generation and appear in the top of the Google search results.

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Austin Tenant Advisors link
2/1/2019 11:43:17 am

I have companies ask me about buying commercial property all the time however in most cases it does not make sense for them.

If the company is growing with plans to add headcount in the future and they need cash to invest in their business it does not make sense to buy commercial real estate.

I like to show them what their estimated return over 5-10 years would be on a commercial property..........then ask them what % return do they make on every dollar invested in their biz

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Commercial Real Estate Orange County link
2/15/2019 02:00:35 am

Great post. Real estate business is amongst the most rewarding businesses. You have provided really good information and ideas which are useful and people can understand better. Keep sharing…!!!!

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Camille Devaux link
2/21/2019 05:21:56 pm

I love the idea that you can freedom to rent this way. This is a wonderful way to make sure that you are keeping up with your real estate. My uncle looking for commercial real estate services would love hearing about this.

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Sariah Meagle link
3/19/2019 07:41:35 pm

Gaining freedom from rent increases motivates me to buy a commercial property from a real estate company. When you said that there's an opportunity for appreciation when buying commercial property, I thought about doing it so I can get some good profit once we no longer need it. I think I will buy a property for sale so that we can gain stability in my business.

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O'Connor & Associates link
4/5/2019 02:15:44 am

Good read. Thanks for the information. sounds so great and helpful. Kudos!


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Bree Ward link
4/16/2019 04:46:03 pm

I like it when you said that owning your own building for your business can safeguard you from moving out and make your improvements worth doing. I like how you discussed the importance of owning your own commercial space. In the event that I will become a business owner, I will prioritize saving to buy my own building and find a reputable real estate company who can help me further.

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Angela Waterford link
5/20/2019 02:55:34 am

You made a good point when you said that I should buy commercial property for sale from a real estate company if it has the opportunity for appreciation. I think buying an office space for my company is a good move because it leads to stability. Since we'll also get freedom from rent increases, I'm sure that this is a choice we won't regret.

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Camille Devaux link
6/5/2019 04:52:18 pm

I love that you will have freedom from rent issues when you have real estate. This freedom is wonderful for a lot of people that want to make sure that they are not wasting a loan. My sister might like knowing this as she looks for commercial real estate.

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Bob link
8/2/2019 10:48:17 am

I love your real estate tips. I hate my house. I'll have to get a better house.

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Ellie Davis link
8/28/2019 11:22:24 am

I liked that you mentioned if you are able to afford the property without affecting your business growth, it will be probably a good investment. My husband is thinking about buying a commercial space for his office, and we are looking for advice. I will call a commercial real estate agent to help us with our decision.

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Ron Booker link
9/23/2019 09:43:31 am

I like that you said that owning your own business office can help gather more revenue for your business. My parent's friend said something about wanting to rent or buy an office space. I'm going to suggest him finding a real state agent to get some help.

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Randy Chorvack link
9/24/2019 09:13:07 am

I appreciate that you said to make sure you can afford a building and keep your company growth. While having a building is important, growth is too because that's what gets your business able to afford buildings in the first place. It's a good idea to make a budget so you can decide how much you can spare for a commercial space.

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Vivian Black link
10/11/2019 05:00:02 pm

Thank you for the tip about making sure that the commercial real estate you are buying is stable and worth taking out a loan for. My husband wants to start a business and needs to buy commercial buildings for it to work. We will keep these tips in mind when searching for a loan professional to help us out.

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Angela Waterford link
10/31/2019 01:19:34 pm

It would be nice to own a commercial property that will act as an investment in the future, so I'm trying to save up for it for now. Thanks for enlightening me that I have to prepare for the cost of the downpayment along with those that are associated with purchasing real estate should I decide to buy one. I think I'll talk to a professional in the future regarding this so I'll know what I should do if I really want to purchase a building.

Reply



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