Buying or renting, such is the question many business people ask themselves around the 1st of the month, when comes the time to write their rent’s check.
With the interests rates being what they are and prices being affected by the commercial paper crisis, the answer might very well be yes if the right property becomes available and you can afford a relatively important cash down.
Owning commercial real estate does have it’s advantages.
Choices: as the owner, you can decide whether to select a building that matches your current needs, has enough room for future expansion or maybe is large enough for you to lease parts of it.
Equity: every month, your payments are applied to paying down your mortgage and building some equity which could be useful eventually to secure a loan for new equipment, to finance an acquisition or simply as an asset.
Appreciation: not withstanding any unforeseen occurrences, your building should appreciate with time. This appreciation could, just as the above mentioned equity, be used to get better financing conditions.
Power: as the landlord, you are the person in charge of deciding how to finance the building, picking the tenants, choosing the decorations, selecting entrepreneurs for the work to be done, improving the building. You even have control over your rent’s rate.
If it’s so great, why doesn’t everyone do it?
The main reason why not everyone owns the commercial space they’re using is that, in real life, thing don’t necessarily go exactly as in late night’s infomercials..
You can buy commercial real estate with no money down, especially if it’s because your money is bringing you more in another (safe) investment.
On the other hand, if it’s because your cash flow doesn’t allow you any flexibility and that you don’t have anything aside should things go a little unexpectedly, then you may want to seriously consider all the ramifications of the deal you are considering.
Your business’ cash flow’s growth stage.
Is your business bringing you comfortable and predictable income which you are looking to invest or would spending an important part of your income hinder any growth possibility for the near future ?
Will you be able to afford any substantial and sometimes unexpected expense should you have to do unexpected maintenance on your building?
Usually, a commercial property will require a 15 cash down which, in some cases, can end up being a lot of money.
Don’t forget you also have to factor in the price of insurances, taxes and legal fees. Due to the importance of the figures involved in most commercial real estate transactions, I recommend you surround yourself with adequate representation meaning: a real estate agent with experience and a positive track record as well as financial and legal advisers.
Examining the tax perspective.
Since I’m not a CPA and that all situations are unique, I strongly suggest you meet with a competent financial advisor who will help you evaluate your particular situation.
For now, keep in mind that in most situations, you will be able to use some of your expenses as depreciations to reduce your taxes or some of the rent as a personal income.
You make your money when you buy, not when you sell.
One last but extremely important factor to consider before making your decision is that you make your money when you buy but realize it when you sell.
Paying more than the fair market value, not taking into consideration your cash flow factors (mortgage, interest rates, insurance, taxes and repairs VS incoming rent, other income possibilities such as parking for example) or letting your feelings dictate a purchasing decision may negatively affect your exit strategy for year if you are not careful.
Though appreciation is quite probable, we suggest you don’t factor it in when crunching your numbers: if the deal is still a good deal without factoring in appreciation, you are likely to make a favorable ROI (return on investment) when you decide it’s time to go for your exit strategy.
If you absolutely need appreciation to justify your purchase, be extremely careful as no one really knows what will happen in the future and, in the present, you may be paying too much.
What you should remember.
So we looked briefly at the different aspects of buying a commercial property. Remember the advantages of being a landlord are:
- Make sure you carefully evaluate your future cash flow.
- Purchasing the property won’t hinder your growth strategy.
- You can afford unexpected and sometimes quite expensive repairs should they be needed.
- You can afford the cash down.
- Get advice from a professional financial advisor about your tax situation.
- Get advice from a professional law adviser.
- Get advice from a professional real estate adviser.
- Avoid free advice as it often end up being the most expensive kind.
- Evaluate the building’s cash flow.
- Make sure the purchase makes sense even without appreciation.
- Find a reputable real estate specialist.