Owning commercial real estate might be one of the most significant opportunities that exist for small business owners to create personal wealth over the life of their business.
What are some reasons that you should purchase commercial real estate?
If location is important for your business
If you have a business that requires physical space to operate then buying commercial real estate might be a better option for you than leasing real estate because it gives you the ability to choose to purchase a property in a place that would be ideal or advantageous for you to operate your business.
The old saying “Location, location, location” still rings true today and you can be strategic about which property you choose to purchase so you can do business with more new clients or do business with your existing clients more often.
Part of the value and owning commercial real estate comes from its ability to enhance the operations of your active business and its ability to increase the amount of sales that you make to current and potential customers through a prime and highly visible location.
If you have an existing lease
If your small business currently leases space you may already be making payments for occupancy costs to operate your business. Those payments are currently being used to pay your landlord’s mortgage and create equity for them.
Generally, for every $1250 that you make each month in a commercial lease payment you can afford to make payments on $250,000 of mortgage lending. So, if your lease payments are $5000 per month potentially you could afford to purchase a $1 million commercial building without changing your current cash flow.
If you can currently afford to make a lease payment you can likely afford to make a mortgage payment instead. Mortgage payments benefit you in that they allow you to create personal wealth for yourself rather than for your landlord.
If you want to build personal wealth
Small business owners who own commercial property benefit in several ways from the growth in equity in their property.
Capital appreciation – historically commercial real estate has increased in value and small business owners who own commercial property benefit from that appreciation by being able to sell the property that they purchased for a higher price later.
Forced savings – every principal payment that a small business owner makes on a mortgage for commercial property is held as equity in that property. Accumulated equity through mortgage payments can also later be recovered when a property is sold.
Capital improvements – when you improve a property that you own through renovation or development that work enhances the value of the property which then increases a potential sale price, which increases the amount of money that you realize on an eventual sale of a property.
What do financial institutions look at when considering offering a mortgage?
Down payment – most financial institutions are going to want you to make a down payment on a commercial property that your purchase. Typically, the required down payment is between 10% to 25% of the purchase price of the building.
If the purchase of the property is in your future, you should begin planning now to put away money each month so that you can make that initial down payment.
Financial statements – Financial institutions will look at the financial statements of a company to determine whether that company is profitable and whether it can make mortgage payments after securing a building and financing.
Having current year end financial statements prepared by a Chartered Professional Accountant (CPA) will allow your bank to look at the financial performance of your business and determine whether or not you’re eligible for lending.
Income tax returns – Financial institutions typically require that a small business owner be up to date on filing their personal income tax returns, corporate income tax returns and sales tax returns and that the balance is resulting from those returns have been paid in full.
Being delinquent or overdue with regards to payment of your taxes may make you in eligible to receive a mortgage. Small business owners should plan to completely paid off personal and corporate tax debt prior to applying for a mortgage.
Cash flow projections – most banks will want you to prepare cash flow projections about the expected future operations of your business so that they can understand what your plans are and whether you expect to have the ability to fund mortgage payments in the future.
Three advisors that you need to purchase commercial property
There are three advisers that we recommend that you engage to assist you in a potential commercial real estate purchase.
Real estate lawyer – a lawyer with experience in commercial real estate transactions will be able to help you to draft the documents or review documents required to purchase a commercial property.
Commercial realtor – a commercial realtor will help you to identify properties that are for sale and make offers on those properties as well as negotiate the terms of a purchase.
Accountant – an accountant will be able to help you to understand the tax consequences of purchasing commercial real estate, selling commercial real estate in the future and recording the activity related to that real estate over the lifespan of your business and over the term that you own that property.
To determine if buying commercial real estate is the right decision for you speak to an accountant today.