The decision to purchase a commercial building is not one to take lightly. In contrast to other types of real estate transactions, purchasing commercial property requires a different approach. It typically involves a greater number of resources, as well as a greater degree of responsibility. Owning a commercial building can have benefits and drawbacks, regardless of whether you are investing in it or planning to use it for your own business.
Buying a property can be financed with a loan or paid with cash upfront. On the other hand, a lease provides you with the use of the property for a predetermined time period, following which you may be required to renegotiate if you wish to continue using it. There are a number of factors to consider before selecting the right strategy for your business, including capital expenditures, recurring costs, tax implications, property valuation, investment value, and other related matters.
It is not always easy to decide whether to lease or buy commercial space when your business decides that it is time to find a new location. It depends on your company's future expectations as well as its needs and requirements to determine which option is the best one for you. A long-term asset such as commercial real estate can maintain its value over time if it is properly maintained. Nonetheless, leasing is often the most appropriate choice since it frees up a great deal of capital, which you would otherwise have spent on the purchase of a property, to invest in your business. If you're seeking to purchase commercial space, consider these pros and cons.
In the first place, if you purchase a commercial property, you will build equity in it just as if you purchased a residential property. Having equity in your business can be a beneficial tool for funding future purchases and enhancing your business's credibility. In case of a cash purchase, you become the owner of the property right away. In the instance of a mortgage, your down and monthly payments contribute to the building of equity in the property. In the event that you refinance or sell the property, equity represents the difference between the deemed fair market value of the property and the outstanding loan balance, and it plays a crucial role in determining your business's overall value.
Your commercial space will be completely under your control. For example, you may want to add a conference room or change out windows and doors if they're not energy efficient enough for today's standards. The building can be remodeled or landscaped as you wish without the restrictions that would be associated with a lease. There is no need to negotiate with a landlord if you want the space rearranged. Unlike rent, your mortgage payment will be fixed every month rather than changing with the expiration of your lease.
In order to borrow money with a traditional loan, you must pay a large down payment, usually 10 to 40 percent of the property's value. Generally, when you lease a property, you don't need to pay a down payment, just a security deposit.
When you buy a building, you're committing to owning that property for what could be a very long time. Most business owners are not able to sell their properties when they need to move on, so they will likely have to rent them out or pay someone else to manage them.
As an owner of a property, you'll be responsible for paying all property taxes and maintaining your building so that it's up-to-code and safe for people who visit or work there. If something breaks down, such as an elevator or heating system, it's your responsibility. If someone gets hurt on your property, then there could be legal consequences too.
In the case of buying property of a larger size than your current requirement or purchasing a plot of land that you do not intend to develop to its full potential on day one, you take on the risk of being burdened with this extra cost. Property taxes and insurance fees will still be due regardless of whether or not your property is being used to its full capacity.
If you're thinking of buying your building, there are a few things you should keep in mind before going ahead with the purchase.
Buying your own commercial property can be very beneficial, but it also comes with some major drawbacks. Before making this big decision, make sure you fully understand all that goes into owning real estate.
Before even looking at potential properties, talk to a lender about getting pre-qualified or pre-approved for financing upfront so that you'll know how much money to set aside for this endeavor and will be able to move forward quickly once you find the right location for your business plan.
Don't forget about costs like maintenance and repairs. You want to make sure that any building purchase isn't putting too much strain on finances before making an offer on any particular piece of real estate.
Purchasing a building can be risky, but it's worth considering if you have the capital and know your business will continue to grow. Also, it's currently easier than ever to get pre-approved for a commercial mortgage. One of the most important factors to consider before buying a commercial property is how long you intend to remain in that location. Buying is more beneficial if you intend to remain in the same neighborhood and building for a long period of time.
In order to obtain the most suitable financing terms possible, you need to consult your real estate agent and your lawyers. In addition, there are a variety of loans available from the Small Business Administration, which are intended to support small businesses purchase real estate, tools, and other equipment at a lower cost than the market rate.