Buying commercial real estate has the potential to be a highly profitable investment. Purchasing it, as opposed to simply renting or leasing, can be a great boon to the company owner who understands the real estate market and its trends, to the individual or company looking to build equity, and to those seeking a way to increase rental income.
Benefits of Buying Commercial Real Estate
The benefits of owning your own property may seem pretty straight forward, but others might not be.
- More Income: When you own commercial property, you can build a structure and rent out empty spaces within it, or rent the land to business owners looking to build.
- Building Equity: Equity is the value of the owner’s share of a given property. The more you pay the bank, the more the value of your investment grows, and your property gains additional equity value.
Appraising Before Purchase
To save yourself from future trouble, always appraise the property before buying.
- Cost Appraisal assumes that the value of the property is equal to the cost to construct or replace the property. It requires an intricate knowledge of material costs and construction and is not commonly used.
- Sales Comparison Appraisal is most often required if an investor is looking for conventional means of financing. The value of the primary property increases or decreases depending on how it compares to other similar properties that have been recently sold in the same market.
- Income Capitalization Appraisal: determines the value of the property based solely on its income in comparison to similar properties.
Pitfalls of Owning Commercial Property
Buying commercial property can be risky if you don’t understand the real estate market and its trends. Keep in mind the risks involved with:
- Future Growth Potential: A common pitfall that many business owners make is choosing a less-than-ideal location for their business in terms of growth possibility.
- Poor Planning: Prior to financing you must be sure of what you can afford and the amount of risk that you are willing to accept. Can the property’s income support its expenses?
A commercial real estate purchase is a decision that should be made only after careful consideration of your business’ current and potential income and its ability to prosper at its current and potential properties. Seek a financial consultation to help you structure your purchase so that it meets your goals.
Purchasing commercial property often requires a large amount of cash up front – as much as 20 to 25 percent of the final price. Make sure that your business can absorb the up-front costs of the purchase, as well the monthly mortgage and any moving costs.
- Mortgage payments are usually calculated as 28% or less of the total income of the borrower. Prior to purchasing real estate you should calculate the financial capability of your business. This way you will know before any papers have been signed, or time has been wasted, if you can handle the mortgage on a monthly basis.
- Other costs include the cost of moving your business to the new location and advertising to customers – perhaps for years to come – the new location of your business.
Be sure to weigh the benefits of owning commercial real estate with all of the responsibilities and potential problems that could come with it. Understanding your market at both the micro and macro levels and its trends should always be one of your top priorities before looking to purchase. Keep in mind that the most important thing to consider before a move is whether or not your business will prosper there.