Buying a commercial building to house your business can be a good investment. Whether you're looking for an office building, a retail property, an industrial facility or a warehouse, buying rather than leasing may be your best move — if you have enough cash. Most sellers require a cash down payment of approximately 20 percent, which can cut into your cash flow. And since terms of most commercial mortgages are 15 years, monthly mortgage payments can be high compared to lease rates.
A purchase can also increase your debt-to-equity ratio, which can reduce your ability to land future loans or lines of credit. Although purchasing property comes with a heft price tag, the benefits often outweigh the costs. Advantages of buying a commercial building include:
- Building equity in the property.
- Avoiding rental increases.
- Managing the property without restrictions.
- Taking advantages of tax deductions.
- The possibility of an appreciation in value.
Know what you needCreate a list of must-haves for your building as well as a wish-list for things you'd like to have but could live without. Calculate how many square feet you need and determine any special needs, such as plumbing requirements, windows or air conditioning.
Find buildingsSeveral Web sites offer national and local search tools for commercial buildings. Many of these services allow you to search by type of building — retail, office, industrial.
Hire a proCommercial real estate transactions can be very complex. Your best option is to solicit the services of a real estate professional who specializes in commercial properties.
Financing your buildingConsider getting a pre-approved loan so you'll know exactly how big your budget is. Approach your current business banker first to determine their commercial mortgage loan rates and terms. When you already have a relationship with the bank, you may be able to negotiate more favorable terms.
Get an environmental reportIf your building, or the surrounding area, has been contaminated by any hazardous materials, you could be required by law to perform very expensive environmental cleanup. Ask the seller for a disclosure statement that reports any known or possible hazards. Obtain at least a Phase I Environmental Site Assessment for any building you're considering.
Check zoning lawsInvestigate your local zoning laws to make sure your intended use for the building is allowed. If it isn't, you can try to change the zoning laws or obtain a variance.
Seal the deal with a contractAny real estate deal should be spelled out in detail in a written contract.
Get title insuranceIf you buy a commercial property and a lien shows up later or you discover that someone else had rights to the property, it can lead to financial havoc. Title insurance guarantees that you hold all the legal rights to the building and will allow you to recover any losses you face from such liens.
- Perform your due diligence: Give yourself approximately one month to examine all existing documents regarding the building, such as maintenance contracts, title documents and insurance policies.
- Generate income: A business owner can purchase a building in his or her own name and have the business pay rent to the owner. This generates income for the owner.
- Sublet: Consider subletting a portion of your building to another business as a way to reduce mortgage costs.
- Consider all the costs: Beyond the price of the building, you'll also be responsible for broker's fees, moving costs, renovations, repairs, furniture and any other improvements.