Buying commercial property is a great investment for your business but can be a long process. Here are some tips that will help speed it along and help cover all your bases.
From 2015 to 2016, commercial rents soared in cities across the US.
The sharp increase in rents wasn’t just limited to well-off neighborhoods. It happened across various neighborhoods, with some the hardest hit being businesses in poorer communities.
The report says that rent increases are especially unfavorable for people seeking to launch new businesses, further increasing barriers to entrepreneurship as well as stunting economic dynamism.
To stem the rising rents, several cities are looking at unique ways to make commercial real estate affordable for entrepreneurs. One of them is encouraging people to own the commercial spaces they occupy.
If your business is feeling the strain of skyrocketing rent, you might be considering buying commercial real estate.
No matter what stage you are at, buying commercial property is a major step to take. However, with this useful guide, it doesn’t need to be a risky investment.
Benefits of Buying Commercial Real Estate
It’s a good idea to buy a building for your business. The word ‘commercial’ in commercial real estate refers to any building you use to support, grow, or expand your business. This can include hotels, shopping centers, warehouses, apartment complexes, office buildings and so on.
That said, there are several reasons to consider investing in commercial real estate. It’s an opportunity to build equity, possibly get tax advantages, and make your expenses pretty consistent.
Here are a few more reasons to buy commercial property.
- Appreciation of property
- Protection from market rent increases
- Control over your image
- Rental income from renters
- Financial leverage (mortgage loans, equity, etc.)
- Tax benefits (favorable interest, capital gains treatment, and depreciation)
- Promotes the image of stability and strength
- Stability of location
- Control over usage, or other tenants in the property
- Control over maintenance and operating expenses
Investing in commercial real estate can be a wonderful opportunity to create wealth. Such deals bring income and can protect you during a recession.
Capital appreciation is another good possibility. Commercial properties are great safeguards during inflation because the rents increase.
Properties generally can appreciate due to internal factors like proactive management (making clever improvements to the commercial space that improves its usability and desirability) and external factors like imbalances in supply and demand.
The tax code benefits property owners in several ways. Depreciation deductions and mortgage interest can shield a significant part of your revenue stream. You should consult your tax advisor to find out all the benefits.
Leverage is also another reason why commercial properties are a special kind of investment.
Typically, commercial properties are bought with 20-30 percent cash, with the rest being covered by a mortgage.
Commercial properties offer diversity and security, and they enable you to quickly build wealth.
They are considered one of the best kinds of real estate. This is partly because out of investing in real estate.
Pride of ownership is another benefit that’s almost impossible to measure, but it’s one of the biggest among all classes of assets. There’s immense joy and contentment in knowing that you own a property that generates income.
Tips for Purchasing Commercial Real Estate
While there’s no one-size-fits-all or tried and tested formula for buying commercial properties, there are some common guidelines every small business owner should use to kick things off.
1. Ask Yourself Questions
Begin by asking yourself several difficult questions. The aim of asking these questions is to better understand the entire picture–what you’re seeking out, what suits , as well as if you’re ready to invest.
Here are some questions to ask yourself:
- What type of building do you want?
- Is the building you want for your own small business? Want to build equity? Rent it out?
- What location would be perfect?
- What’s your tolerance for risk? How much can you put into it?
- What skills do you possess? What skills are you going to contract out or hire?
Asking as many questions as possible will help you have more information to work with. Also, the more information your accountants, sales associates, and anybody else involved in the real estate purchase have, the better it is for you.
2. Do Your Homework
Consider and visit a variety of properties. Determine what works for each property and what doesn’t. Consider the most critical factors for each property, such as cost, location, allowed uses, and condition.
The significance of location cannot be gainsaid. Properties located near downtown areas, hospitals, or universities will typically cost more and sell faster.
More importantly, you’re looking for a property that’s a good fit for your business. Your needs and situation are unique. The building you want to purchase should be a good fit when it comes to location, uses, price, and investment required.
Important calculation for any building: It should be solvent after subtracting principal, interest, tax, as well as insurance (PITI) from the yearly income earned from rent.
Here are other vital questions to ask about each commercial building you’re interested in:
- What can be the use of the property? What can’t the building be used for?
- What types of taxes does the property have?
- What kind of income/rent does the building currently generate annually?
- What things will require repairs or replacement?
- Why is the property being sold?
- How’s the area near the building doing? Are there any major changes coming up?
3. Sort Out Your Finances
Since buying commercial properties is quite a challenge, you’ll want to plan well ahead of time. Above all, you’ll want to sort out your finances before you even start.
Your financial position will determine what kind of commercial building you can afford. Be wary of going for a property that’s way beyond your budget; otherwise, the bank is more likely to deny you financing.
It’s a good idea to talk to your accountant to get a picture of what’s within your price range.
They’ll also help you create a budget that includes any hidden costs that come with this kind of purchase. Your accountant can also get you tax benefits that could be crucial to your financial situation.
4. Get the Experts You Need
Purchasing commercial property is usually a complex affair. You’ll likely need experts to help you with certain steps in the process. What experts to hire and how many will largely depend on the kind property you’re buying.
You’ll need an accountant, commercial realtor, commercial real estate attorney, and mortgage broker, at the very least.
An accountant can assist you to analyze the tax and operating benefits, and what you can afford.
A commercial real estate attorney will negotiate with the property seller for you if necessary. He or she will also assist you to tie up the transaction.
A commercial real estate broker will help with identifying the buildings you want, which meet your criteria. But all the potential buildings should be within your price range.
A commercial property mortgage broker will help you take care of the financial side of completing the transaction.
If the property is more complex, you might need other experts such as tax experts, notaries, environmental specialists, and/or engineers.
There are certain things you can sort out yourself (with research) but there are many others that are better left to experts.
5. Find the Best Property for Your Business
When looking for the perfect commercial property, you’ll need to consider several factors.
Location is usually the most critical factor. You have to consider employee and customer access, distance from suppliers and vendors, as well as easy access to your chosen shipping options.
If you need help with surveying and mapping your preferred location, AGS Trimble GPS is ready to help.
The property you’re targeting may need maintenance and repair as well, and you must factor this in your budget. Also, your business will require adequate parking space for you and your customers’ needs.
Have the property thoroughly inspected and find out in advance about potential liability and environmental challenges, such as lead paint or asbestos.
You’ll need to find out whether the property can be used legally for your intended purpose–whether that’s retail, office, or industrial–and that any current exterior or interior building limitations won’t compromise your current or future trading interests.
While you may be considering expansion simply in terms of your company’s growth, you should remember that any extra space can also give you leasing and income generating options in the future.
Buying Commercial Property: Summing Up
If it was easy for everyone to start buying commercial property, we’d all do it. But the truth is that it is not that simple. There are plenty of hurdles to overcome in order to ensure that a seemingly good deal is indeed good.
We hope you’ve been convinced to try real estate investing and include it in your investment range. It’s an amazing way to earn a great living.
If you’re considering purchasing commercial property, we are happy to help you. Be sure to for help and guidance before you enter the market.
