Even if you have no prior experience purchasing a commercial property, you can still arm yourself with information to guide you through the process. Here are 10 suggestions for purchasing commercial property that every small business should take into account:
1. Before making any decisions, conduct a lease vs. buy analysis :
I go into more detail on this in the first piece of my small company series, so I won't go into it here. But before any small business purchases a building, it should first compare leasing to buying. It ought to respond to the following inquiries:
Opportunity cost: What is the value that is lost when one option is chosen over another? Building ownership-related equity cannot be invested elsewhere to promote growth.
2. Create opportunities for future expansion for your company:
I previously indicated that most small businesses acquire real estate by accident. And if the area can no longer accommodate the business' operations, that becomes a problem. To systematise the purchase process, a business should perform a thorough growth analysis prior to buying a property.
Forecasts for sales growth are a common statistic used by organisations to help them make decisions. A company can more accurately predict its space needs by taking the study a step further and anticipating the rise in variable accounts driven by sales (headcount, workstations/offices, parking, meeting space, etc.).
A thorough programme analysis can assist in projecting space demands over the next five, ten, and twenty years, preventing organisations from making hasty real estate decisions.
3. Choose the ideal location:
Depending on your business strategy, location is more than just being near your target audience. Because job talent has historically gathered in metro areas, they have served as employment hubs, and real estate has benefited from this in-migration.
If hiring new talent is an issue, your company's location should be close to the people you hope to hire. Real estate in the secondary market might be a better choice if the cost of acquiring the land or the site is more important to you.
4. When determining your reasons for buying, ask the correct questions:
Real estate is a separate asset from your business's operations, so choosing to purchase a building shouldn't be based on whether it would increase the worth of your company. You should pose the following qualifying questions to determine your buying motivation:
- Is the property only to be used for my commercial operations?
- Do I want to purchase a block with multiple tenants and start a landlord business?
- Would I prefer to keep the property in order to increase my equity?
Depending on the response, your hunt for a home can be a little more complicated. If you're a landlord, the longevity of the rental market is something you should carefully examine.
On the other hand, if your company values flexibility, your real estate search will produce different outcomes.
There may be no correct response, but the criteria for your real estate search will be influenced by your underlying motivation.
5. Select the best form of ownership:
Depending on how real estate is held, an owner may be liable to disproportionate obligation and high taxation.
When a distribution is made, real estate held by a C company is subject to double taxation at the corporate and individual levels. In contrast, property held in a person's name is not protected by the corporate veil.
In general, most real estate owners prefer an LLC as their legal form. It keeps the real estate and business assets apart and offers legal protection while lowering tax liability.
6. Put together the best team possible :
A real estate transaction demands an expert for every step. Here are a few important team members to keep in mind if you're considering purchasing a building:
Lender: Probably the most important person on your real estate team, a lender has the power to make or destroy a deal. They must be resourceful, open to collaboration, and driven to secure the best possible terms for you.
CPA: You should utilise depreciation/interest tax shields and deductible property-related expenses when it comes tax season. Your CPA should be able to explain the ramifications for the balance sheet and financial statements.
Attorney: To help you through the deal, your real estate attorney must be prepared. But in addition to helping you with paperwork, an experienced lawyer can facilitate contracts or guide you through environmental and title issues.
Broker: Don't discount a person who can find a high-quality product. Through their relationships with property owners, negotiation skills, and capacity to develop off-market opportunities, a good broker adds value to the transaction.
7. Take into account local laws:
Every city has its own set of laws. And it's crucial to comprehend what it entails for your organisation before you purchase a building.
A property's zoning will specify the permitted uses. The operations of your company might or might not be accommodated by that approved usage. Your future ability to fit out the room, alter the structure, or develop the site may also be constrained depending on the municipality.
Having a basic understanding of local laws will help you stay heartburn-free in the future.
8. Take into account cash budgeting:
Your company can be needed to fund a down payment of between 10% and 20% of the purchase price, depending on the type of financing you receive.
There would be a capital requirement for any necessary upfit if the room wasn't already suitable for use.
Purchasing shell space may make sense if your company even needs a highly customised build-out. This would cost cash, therefore you wouldn't want to burden your company with yet another note.
9.Be deliberate in your search for the correct financing:
If you're a small business purchasing a building to occupy, you need to be aware of your possibilities. Capitalization counts.
Mortgages with lower down payments, longer amortisation terms, and the option to roll construction costs into the note are all available through the SBA 504 loan programme. Flexibility is possible, but at a cost. SBA financing has a cap and typically requires more time to get than a conventional mortgage, which could be a disadvantage.
Although a conventional mortgage is quicker, the terms may not be favourable.
10. Take into account the property's condition:
Just as when purchasing a home, a property's age and condition are important. Real estate is prone to deterioration in terms of both function and appearance, and if it hasn't been properly maintained, it may become a significant drain on cash flow.
Older properties will typically carry deferred maintenance, while newer buildings and higher-end space will cost more per square foot. Understanding when your cash flow requirements may arise will help you as a small business owner determine the best type of space for your operation.