- Buying your building can help you avoid unpredictable rent hikes, but also carries its own unique risks
- Determining whether making an offer on your building or another commercial property is the right choice
- Financing options and the professionals who can help with the process
Summary by Dirk Langeveld
Business owners manage a variety of fixed and variable costs, though recent circumstances have shown that plenty of expenses are subject to fluctuation. Costs for supplies have been on the rise, and many employers have been responding to a lack of available labor by raising their compensation.
The cost of leasing a commercial space can also be an unpredictable factor of running a business. This expense can often remain stable for years, as landlords are interested in collecting steady income and keeping existing tenants. However, there is always the possibility that the building’s owner might increase monthly payments or sell to another landlord who will. This scenario can take a major toll on a company’s profits, force it to relocate, or even cause it to close entirely.
For this reason, it can sometimes make sense for small business owners to purchase their space instead of continuing a lease agreement. This can create more stability in monthly expenses, and will also provide a long-term asset that can significantly improve the value of the company.
Of course, purchasing a commercial property can be a major and costly endeavor. Fast Company recently noted how the prospect is challenging enough that a new startup company, Withco, is helping small businesses in single-tenant commercial spaces to buy their building if it comes up for sale so they don’t get priced out.
When deciding whether you should purchase your commercial space, be sure to take the following issues into consideration:
Understand the benefits and risks of buying
Purchasing a home instead of renting allows you to have more control over your residence and build up equity instead of funneling monthly payments to a landlord. The same benefits apply to buying a commercial property instead of leasing space. You’ll have more flexibility over renovations and other changes you want to make to the property, as well as the potential to generate additional income by leasing extra space to tenants.
Buying a property can offer greater stability in your monthly costs compared to leasing. While rent payments can unexpectedly change at the end of a lease, the amount of a mortgage payment going toward principal or interest will remain steady for the life of the loan.
Since you’ll be building up equity with your payments, buying a commercial property can have long-term benefits. Even if your business ends up closing, you can still collect income from selling or leasing the property. If you end up selling the business, you can command a higher price by including the building in the transaction rather than just the company itself.
Of course, there are certain risks to buying a commercial property as well. It’s an expensive purchase, which might not pan out if you don’t end up running the business or keeping it in the same place for several years. Buying a property also creates more responsibilities in areas such as property upkeep, minimizing liabilities, and tenant relationships.
Consider your outlook for the business, including whether the property will be able to accommodate any expansion plans. You should also assess the same issues that go into selecting any property to start a business, including the location, zoning rules, and condition of the structure.
Check your books and compare financing
You’ll be in the best position to purchase a commercial property when your business has a stable cash flow, you have enough cash on hand for a down payment, and you have long-term prospects for continuing the company.
Several financing options are available for commercial property purchases, including conventional mortgages, bridge loans, and hard money loans. The Small Business Administration also offers 504 loans, which can be used to construct, purchase, or improve buildings and facilities.
Be prepared to include an earnest money deposit as part of any purchase. This is equal to about 1 percent of the purchase price, and cannot be refunded even if the purchase falls through.
Work with the pros
Work with a real estate agent to ensure that buying a commercial property is the right step for you. This professional can help you determine whether the building meets your needs in terms of size, location, amenities, and other needs. A real estate agent can also help you with leasing out any extra space to tenants.
Get the property checked out by a professional inspector to assess its condition. This process can help assure you that the property is in good shape and won’t result in a major repair bill in the near future.
Work with an accountant to calculate the costs of buying a commercial property, factoring in any additional costs for insurance, utilities, maintenance, and other expenses. You can then compare these figures to the cost of leasing to see which one is more cost-effective.
You might also want to form a separate limited liability company to buy a property. Owning a building and managing tenant leases create their own unique risks, and an LLC allows you to separate them from your own business.
For more information on housing your company, read our Expert Summary “Housing Your Startup: Garage, Rent, or Purchase?”