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 relatively important cash down.
Owning commercial real estate does
have its 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.
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 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.
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:
- Choices
- Equity
- Appreciation
- Power
- 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 advisory 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.
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