Location and operating on commercial spaces are crucial factors in running a business. Whether you’re running an office, clinic, factory, or retail store, you’ll have to decide whether to buy or rent.
Leasing a property sometimes has a negative connotation with business owners. They may be influenced by their network or by a broker who has that mindset. But in my experience, in the long run, most business owners end up preferring to rent rather than buy the commercial property on which they operate.
Yes, most real estate assets gain value over time. That said, it’s important to consider the downsides of owning your business space.
YOU NEED EXPERIENCE IN PROPERTY INVESTING
Many business owners who buy their commercial property are simply looking to eliminate their rent payment, thinking they will save money on a monthly basis. But some brokers can easily spot amateur investors. You may end up paying above-market rates for the assets—not to mention the upfront spending. It’s a fine line between wasting money and saving it.
YOU COULD END UP STUCK IN A BAD LOCATION
Say you buy a property and then you realize, a few months or even a few years later, that your company would do a lot better in a different location. You’d likely feel torn: You probably spent a significant amount of money to buy the property, which makes it hard to part with. You may have even spent so much that you don’t have the means to lease another property. That’s a hard situation to be trapped in.
YOU COULD OPEN YOURSELF UP TO LIABILITIES
If you decide to buy the commercial property, then unfortunately you may be liable in the event of an accident. Keep this in mind as you choose your insurance options—you want to be protected against any possible charges.
For these reasons, renting may end up being easier for you as a business owner. Many leaders find that they prefer to focus on the business itself and let a property manager worry about things like location and liabilities.
Even if we associate real estate properties with price appreciation, the possibility of property depreciation can’t be eliminated. When you buy a commercial property, you have to take into account the aging process of the building and the ups and downs of the market. Liquidity could be an issue while you’re playing the waiting game for property appreciation.
In a nutshell, unless you have experience investing in commercial property, you’re 100% confident in the value of your building’s location over the long-term, and you’re comfortable taking on some liability and risks, then leasing may be the right option for your company. With a lease, you have the flexibilty to move if you need to, you can take advantage of certain tax deductions, and you are free from the responsibilities that come with ownership at any level.
How to Buy a Commercial Real Estate Property
Commercial real estate has the potential to be an excellent investment, often more so than residential properties. Yet even if you’re an experienced real estate investor, it’s crucial to understand that the process of buying a commercial property isn’t the same as buying a house to live in.
In this article, we’ll look at why you should consider buying commercial real estate, financing options available to you, and how to buy it.
Benefits of Investing in Commercial Property
Before you purchase a commercial property, it helps to know the pros and cons of this type of investment.
Real estate investing brings the opportunity to realize a profit over time, but also brings risk, as any investment does.
If you’ve been leasing property for your business, you may find it more affordable to purchase it, since your monthly mortgage payments may be less than rent.
How to Buy Commercial Property
Now let’s go deeper into those steps to buying commercial properties.
1. Understand your motivations for investing in commercial real estate.
Why do you want to invest in commercial real estate? It’s an important question to ask yourself before you start hunting for properties.
Do you want an apartment or office building that you can rent out to many tenants to help reduce the risk of non-payment? Are you searching for a property you can use, at least in part, for your own business?
Perhaps you’d like a larger property with the potential to appreciate and build equity over time. Maybe you’re looking to take advantage of tax benefits or scale your investment portfolio.
Whatever your motivation, it’s helpful to identify your “why” before you invest. Knowing why you want to purchase commercial property can help guide you as you search for the right investment opportunity.
2. Assess your investment options.
Looking at the list of types of commercial property above and determine which best fits your needs. Will you be running your own business out of the property or having other tenants only?
3. Look at the real estate market.
The real estate market goes up and down, so it can be a good idea to pay attention to it long before you are ready to buy. Paying attention to the ebbs and flows of the market could help you set yourself up for the opportunity to take advantage of a great price in a down market.
4. Secure financing.
Before you find a commercial property you wish to buy, it’s wise to line up your financing options in advance. Step one to securing commercial real estate financing (and other types of business financing as well) is to check your credit.
Depending upon your lender and the type of loan you apply for, your business credit scores and reports could come into play. Some lenders may check your personal credit too.
You should review your credit and make sure that the information contained in your reports is accurate. You can check your personal and business credit scores for free when you set up an account with Nav.
Once you verify that your credit information is accurate (you can dispute errors if you find them), take an honest look at the type of financing you might qualify for now. Depending on your credit, the type of property, and other factors, you might consider the financing options we discuss later in this article.
- Apartment Loans (Fannie Mae, Freddie Mac, and FHA)
- Bank Balance Sheet Loans
- Commercial Real Estate Loans
- Small business Loans
- Hard Money Loans
- Seller Financing
Be sure to compare interest rates, fees, repayment terms, and other factors as you shop for the best financing option available to you. The Nav Marketplace is a great resource for reviewing business financing choices.
5. Partner with the right team.
Buying commercial real estate involves a lot of moving parts. In other words, it can be complicated. Even experienced investors know that it’s important to surround themselves with the right team of experts to make sure their investment has the best chance of success.
Here are some of the experts you may need to make sure your commercial real estate deal goes as smoothly as possible:
- Commercial Realtor
- Commercial real estate attorney
- Commercial real estate broker
- Tax attorney
Before you start shopping for potential properties, it’s wise to have your team already on hand. If you find the right help upfront, you’ll immediately know who to turn to when questions or problems arise. Assembling a team of pros might not be cheap, but it might save you from costly mistakes in the long run.
6. Find the right property in your market.
Once you know your “why,” you understand your investment options, you’ve secured financing, and you’ve put together a team of experts, it’s time for the fun part. You’re ready to start shopping for the right property in your market.
Your commercial real estate agent can help you locate commercial or industrial properties that meet your criteria. Pay attention to important factors, like usable square footage and location. However, don’t be distracted by a good deal if it doesn’t satisfy your reason for investing. For example, it doesn’t matter how great an office building looks on paper if you’ve decided you want to add an apartment complex to your investment portfolio.
7. Do your homework.
When you finally locate a property you may want to buy, it’s time for some heavy research. Again, your commercial realtor may be able to help you here, but it’s wise to make sure you’re personally doing your due diligence on the property as well.
Remember, you can never have too much information about a property you’re thinking about buying. Some questions you may want to ask or research include the following.
- What has the property been used for in the past? (Do you plan to continue using it for the same purpose?)
- If you wish to use the property for a different business purpose, is it appropriately zoned to support your plan?
- Can you request a change in zoning, if needed?
- How much income or rent does the property currently earn on an annual basis?
- Will the owner show you the rent rolls? Can you confirm that the units listed on the rent rolls currently have the tenants reported?
- What are the property taxes?
- Is the building in need of significant repairs now, or will it need repairs soon?
- Is the property located in a desirable area? (Ideally, you should look for locations that have less than 5% vacancy if you want to command higher rents and enjoy potentially high appreciation rates.)
- Does the deal make sense for your investment portfolio?
Buying a commercial property is quite different from purchasing residential real estate. Making a bad investment could be far more costly. If you’re new to the world of real estate investment, a wise place to begin is studying resources and real estate investment books from other successful investors.
8. Make an offer and close the deal.
When you find a property you want to purchase, it’s time to make an offer. Your commercial real estate agent will generally help you write up your offer to purchase, but it’s wise to have your attorney review it for good measure before you sign and submit it. Be prepared for the seller to ask for earnest money (potentially 1% of the purchase price, though sometimes more or less) when you go under contract.
Above all, make sure your offer has a due diligence period with an escape hatch if certain things go wrong (like zoning issues or the property failing to pass inspection). The technical term for this escape hatch is known as a contingency clause.
During your due diligence period, your lender may require an American Land Title Association survey (aka an ALTA) as a condition of closing. An ALTA survey can give you valuable information about the property, including boundary lines and the location of improvements, utility lines, and easements (if applicable).
If all goes well with your ALTA survey and the rest of your due diligence, you can continue to move forward toward closing. Your commercial realtor and real estate attorney should be able to guide you through the many complex steps involved in this process. Again, it’s crucial to set up a reliable team of experts you can count on in advance, long before you draw near the closing table.
Commercial real estate acquisition: 5 tips for success
Buying real estate is a costly undertaking, and business owners need to exercise due diligence every step of the way. Without proper planning, entrepreneurs can face a host of problems, including inadequate financing, unexpected construction costs, inefficient layout and environmental lawsuits.
Although real estate costs have shot up in recent decades, entrepreneurs are still usually better off buying properties than renting them. Not only will you not be faced with rent increases, but your property may appreciate in value as well. Plus, a buyer can deduct the value of a loan, mortgage interest or depreciation in the value of a building from company taxes—something that can’t be done when renting.
So what makes a successful commercial real estate acquisition? Here are five tips that can help.
1. Understand the local real estate market
Before making a decision on what to buy, entrepreneurs should pay heed to where they’re buying. Each local market has its own tax rates, land inventory and environmental issues. The supply of skilled labour in the area also needs to be considered.
2. Consult an accountant
Affordability is a big issue in commercial real estate today, so before you go to a bank, you should work with an accountant to determine your budget. Make sure your budget includes all hidden costs.
Tax implications can also be complex in real estate transactions. That’s why it’s particularly important to consult an accountant who knows the ins and outs of commercial real estate deals.
Your accountant will be able to tell you, for instance, whether the purchase should be considered a corporate or personal transaction. Other issues include succession planning, transition financing and decisions about how assets will be broken up when the business is sold.
3. Get your financing in order
Getting approved for commercial real estate financing isn’t easy.Bankers will want to see high-quality financial statements and evidence that the profits you generate are being retained by your company. All of this will play a big role in determining whether you get the commercial real estate loan you want.
It’s also a good idea to shop around for the best financing package. Don’t forget that while the interest rate is important, it’s far from the whole story. Other factors such as what percentage of the purchase a financial institution is willing to finance are equally, if not more, important.
You should also resist the temptation to sway lenders with overly optimistic forecasts—payment problems down the line can boost costs and reduce your manoeuvring room.
4. Plan your layout well
Whether it’s an existing building or one you’re renovating, layout has a major impact on operational efficiency. That’s why it’s often a good idea to hire an operational efficiency expert to advise you on how to optimize your layout.
5. Choose the right builders
You should be looking for quality builders who have a good reputation and are responsive to your needs. Key traits of good builders include experience, timeliness and knowledge of your industry.
For example, if your building must meet food-industry standards, your builder should have expertise in that sector. A builder’s financial history should also be considered. You don’t want a situation, for example, where a contractor is taking your deposit to fund a previous job where they ran out of money. If you have any doubts, do a credit check.