All You Should Know Before Buying Commercial Real Estate
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.
Why invest in commercial property?
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.
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.
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 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.
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 its 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. Call The Elite Agency for all your commercial needs.
80 South 8th Street, Suite 4905
Minneapolis, MN 55402