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Everything you need to know about commercial real estate

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Everything you need to know before purchasing commercial property

Purchasing or leasing, such is the inquiry numerous money managers pose to themselves around the first of the month, when comes an opportunity to compose their lease's check.

If the right property becomes available and you are able to afford a relatively substantial cash down payment, the answer may very well be yes, given that interest rates are the way they are and the commercial paper crisis is affecting prices.

Possessing commercial real estate has its benefits

Choices: As the owner, you have the option of selecting a building that meets your current requirements, has room for expansion, or is large enough that you can lease portions of it.

Equity: Your monthly payments go toward paying off your mortgage and building equity, which could be used to get a loan for new equipment, finance an acquisition, or just as an asset in the future.

Appreciation: Your building should appreciate over time, despite any unforeseen events. Similar to the equity previously mentioned, this appreciation could be utilized to obtain improved financing conditions.

Power: You, as the landlord, are in charge of deciding how to finance the building, who will live there, what will be decorated, who will do the work, and how to make the building better. Even the cost of your rent is within your reach.

Why isn't everyone doing it, if it's so great?

You can buy commercial real estate with no money down, especially if your money is bringing you more in another (safe) investment. This is the primary reason why not everyone owns the commercial space they're using. In real life, things don't always go exactly as planned. 

On the other hand, if your cash flow doesn't give you any leeway and you don't have any money set aside in case something goes wrong, you might want to seriously think about all the implications of the deal you're considering.

Your business' income's development stage

Is your business providing you with a steady and comfortable income that you want to invest, or would spending a significant portion of your income impede any potential for growth in the near future?

If you have to perform unanticipated maintenance on your building, will you be able to afford any significant, sometimes unanticipated costs?

A commercial property usually needs a 15 percent cash down payment, which can sometimes be a lot of money.

You must also take into account the cost of insurance, taxes, and legal representation. I recommend that you surround yourself with adequate representation because of the significance of the figures in the majority of commercial real estate transactions: a real estate agent with a good track record, experience, and financial and legal advice.

Examining from a tax point of view

I strongly advise you to meet with a competent financial advisor who can assist you in evaluating your particular circumstance because I am not a certified public accountant and because no two situations are alike.

For the time being, keep in mind that, in most cases, you will be able to deduct some of your costs as depreciation to lower your tax bill, and you will be able to deduct some of the rent as personal income.

When you buy, not when you sell, you make money

Last but not least, the fact that you make money when you buy but realize it when you sell is a crucial consideration before making a decision.

If you are not careful, you may negatively impact your year-end exit strategy by paying more than the fair market value, disregarding your cash flow factors (mortgage, interest rates, insurance, repairs versus incoming rent, other income opportunities like parking, for example), or letting your emotions dictate a purchase.

Even though appreciation is very likely, we advise against including it in your calculations: If the deal is still a good deal even when appreciation is taken into account, you will probably get a good return on investment when you decide to pursue an exit strategy.

Be extremely cautious if you absolutely need appreciation to justify your purchase, as no one really knows what will happen in the future and you may be paying too much in the present.

Talk about the situation with a trustworthy real estate agent. What you should keep in mind.

As a result, we briefly examined the various aspects of purchasing a commercial property. Keep in mind the benefits of being a landlord:

* 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 advisor 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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