If you are interested in buying commercial properties, you need to have a good amount of expertise. You need to know that having enough money to purchase a certain property is not enough for you to make a decision. You also must be familiar with the market conditions.
Buying commercial real estate can be a good purchase for your business, especially if you’re trying to cut costs by using it for your own operations instead of paying a landlord who can increase the rent at the end of lease period, often times it can be a significant increase. However, before you make this decision, there are several factors to consider, ranging from the financial condition of your business to the viability of the commercial real estate you are looking to buy. It’s important to understand that these types of decisions are made after careful analysis of the potential return on investment. Here are some of the factors to consider:
Analyze the benefits of buying commercial real estate, as well as the risks.
• A benefit of purchasing commercial real estate may be that if you are buying to maximize your return on investment, it will, in most cases, offer more returns than leasing.
• If your company has substantial profits, you can offset those at tax time by claiming depreciation of your property.
• Though for tax purposes you can claim depreciation, owning commercial property adds to your asset appreciation over time, which means that your company’s equity grows.
• A risk of purchasing commercial real estate can be that the choice of location doesn’t withstand real estate trends. In other words, a location that’s in high demand this year can lose all commercial appeal next year, and that affects the value of the property, as well as the attraction of your business if it operates out of that location.
• Another risk of investing in commercial real estate can be loss of liquidity. When a business invests a substantial sum in commercial property, that’s money that isn’t easily available when it is needed for other things. Although this isn’t likely to be a problem when business is good, in tough economic times it can be hard to sell real estate to utilize the money.
• If the plan is to rent out the property, it’s important to understand that leasing is not a secure form of cash flow. Tenants can be late with their payments, or even neglect to pay at all, and if you’re depending on the
income it can be a stressful situation.
Assemble a group of experts to advise you. You’ll need an accountant, a lawyer, a commercial realtor, and a mortgage
broker on your team
• Your accountant can discuss the financial aspects and options of buying commercial real estate.
• Your lawyer can help you draw up any contracts pertaining to buying or leasing a property.
• A commercial realtor can alert you to viable properties in the area.
• A mortgage broker can work with you to obtain the necessary funding for your real estate investment.
Choose a commercial property to buy.
Factors to keep in mind before buying a property are location, condition of the property, allowable business uses, accessibility to clients and suppliers, and what possibilities are available for leasing and re-selling. In addition, make sure to do a title search so you know the property is not burdened by any pre-existing agreement or liens, and check the zoning laws to see what types of business are allowed in that location and what types of adjustments to the infrastructure and city planning might affect the property.
Secure financing for the commercial real estate.
Make sure before you apply any mortgage, that you have the down payment covered, as well as proven income to cover the monthly payments. Understand concepts such as Loan-To-Value (LTV) and Debt Service Coverage Ratio (DSC) and compare loan terms and rates.
Buy the commercial real estate.
Have your lawyer explain every detail of the sales agreement so you know exactly what your rights and obligations are. There are a number of factors to consider when looking for the right property to purchase. The old adage “location, location, location” is true for commercial properties just as much as it is for residential. But there are other factors to consider, as well. Here are some things to look at:
• Location. This is still the No. 1 issue. You want to be close to your customers, your workers, transportation and your vendors or suppliers. This is especially true if you have a retail or service business where it is vital to have customers come to your place of business
• Physical condition. After identifying the general location, consider how the property was used, the wear-and-tear, whether there are any environmental issues or potential liability issues, such as asbestos or lead paint. In addition, you need to calculate how much it will cost to repair or alter the building to fit your business
• Allowable uses. If you are a professional firm, you likely need commercial office space. If you are a manufacturer, you need an industrial space. Either way, you need to make sure the zoning allows you to do what you need to do on the property.
• Limitations on exterior and interior. Whether due to zoning laws or building codes or agreements, there may be limits to changes or alterations you can make to the property. One example is a building that is in an historic area and subject to restrictions on changes that can be made to the outside.
• Adequacy of access and parking. You need to make sure your customers can park and take into consideration whether access is compliant with laws such as the Americans With Disabilities Act.
• Opportunity for expansion or leasing. Most business people have an optimistic view about expansion and so the potential to grow is a consideration as is the other side which is if you don’t grow as much as planned, can you lease out extra space?
As can be seen, buying commercial property takes planning and analysis. It is important to have trusted advisors to
be a guide through the entire process.
