You’ve probably asked yourself the question “Should I lease, or should I buy” in the past when it came time to get a new car or decide on where you wanted to live. But, it’s also a question to ask yourself if you own your own business. If you’ve been struggling to find a rent that fits your needs, dealt with increased rent year after year, or you’ve outgrown your current space – it may be time to investigate buying your own space. Purchasing commercial real estate is a big step that can have far reaching impacts on your business’ cash flow, balance sheet, and funding options, so it does require some serious thought. If you have the capital, here’s why now is the time to act.
Equity. Just like with purchasing your own home, your monthly commercial real estate payments will go directly to paying down the balance of the loan – helping you build equity in the property. With renting, your monthly payments go to the building owner who gains the equity. When you eventually sell or refinance your property, you can extract the difference between the remaining loan amount and the current fair market value as equity for your business.
Control of the Property. This means no more yearly rental increases or requests to make changes to the facility. When you buy commercial real estate, you control your property. You have a fixed monthly payment for as long as you stay in the space that’s not tied to the commercial rental market flux and you can make any changes to the space that you need to.
Rental Potential. If you buy a building that is larger than your current business needs, you can rent out the additional space and take advantage of some rental income potential. If you choose to go this route, don’t forget that you’ll have the added responsibility of being a landlord and having to deal with the various requirements. You can always hire a property management company if you don’t want to deal with this directly, but this will eat into your profit potential from renting.
Asset Appreciation. When you own commercial real estate, you can take advantage of asset appreciation. Asset appreciation is the increase in the value of your property over time. The U.S. Commercial Property Price Index has increased by as much as 26% over the last 10 years. When you eventually sell your commercial property, you earn capital gains equal to the difference between the purchase price and the current fair market value. This can add up to some big bucks in profit.
Diversification. You’ve probably heard that you should diversify your investments, but maybe you aren’t sure why. Since commercial real estate doesn’t follow the patterns of other investments, like stocks and bonds, it’s a great way to create another plan for retirement. If there is a financial collapse in another sector, your real estate investments may be less adversely affected and vice versa. It’s a good way to keep those proverbial eggs spread out and not all in one basket!
Buying commercial real estate isn’t something that you should take lightly. You should consult with an expert and obtain a commercial property appraisal so that you are putting your investment dollars into the right properties. A professional real estate appraisal company will be able to tell you if the neighborhood, amenities, and the property itself are right for your investment portfolio. If you have any questions, our Commercial Lending Team is happy to help you determine your options.
Bob E. Teittinen
Commercial Lender, Senior Vice President