When you start to look around your office and realize that you need more room, it could be time to make the leap from renting to buying. This is particularly true if you’re renting almost an entire building for your company. The first time you consider buying commercial real estate can be a bit frightening. A house is a big investment—a building is a bigger one. How do you know if it’s the right time to buy? Can your business handle the transition?
Before we continue, take a deep breath. This article will answer most of your questions. Have more? Give me a call, and I can walk you through the process.
The Benefits of Owning Over Renting
There are a wide variety of benefits to buying an office space for your company instead of renting it. When you rent a space, rent goes up every year. When you own the building, you have a mortgage payment that stays at a flat rate. Your “rent” payment will stay the same each month, with no increase.
Assuming the value of your building doesn’t go down, the principal balance of every payment that you make on your building mortgage goes directly back to you as equity on the property. Your building is an investment. You can sell the building after your company outgrows it or rent it out for a (relatively) passive source of income.
Another benefit of owning a building is the flexibility and independence that comes with it. No longer is your office in a rented space where you need the landlord’s permission to make changes. When it’s your building, you could paint the interior walls purple if you wanted to, and no one would have the authority to say anything.
When It’s a Good Time for Your Business to Make the Leap
Knowing when it’s time for your company to buy a building can be difficult. Each company is unique and needs to make the decision based on their own individual values. However, there are some things in common that can tell a company when it’s time to buy.
Some companies have specific space requirements that can make it difficult to find the perfect property. For example, if you’re looking for a landscaper or contractor yard, then you could find yourself waiting quite some time for a space to become available. The next time a space comes up for sale, it’s a good idea to jump on the opportunity and buy. Otherwise, you could find yourself waiting another five or six years for the next opportunity.
Another indicator that it’s a good time for your company to buy a building is the size of your staff. If you find yourself needing to rent out an entire building to house your employees, then that’s a pretty clear sign that investing in commercial real estate would be a good idea. A five-person company probably doesn’t need to buy a building. But a 50–100-person company might need to.
The bigger the building you need, the easier they are to buy. Small office spaces are hard to come by. Typically, if you’re looking for a 3,000 to 6,000 square foot building, you’re looking at townhouses or office condos, not an entire office park. Before striking out to buy a building, consider the size you need. If it’s on the smaller end, you may get a nicer space by renting part of an existing office park.
Other indicators include a generally financially healthy business. You need to have more income than debt, a healthy balance sheet, and not too many liabilities as compared to your assets.
Why Now is the Time to Buy
Deciding when to buy a building isn’t just dictated by your business’s financial status or the availability of property. Now (September 2019) is a good time to buy for several reasons. To start with, summer is ending. Unlike residential real estate, summer is the slow time to buy CRE. In the fall, people begin to focus more on business, meaning that more properties are available, and the market is more active.
Next, interest rates are low. A lower interest rate means that you can pay off the principal balance of your loan faster, and, overall, pay less for your investment. At the moment, there’s still a lot of money out there that banks can lend. Besides the trade war, there are still good economic indicators that show some positive signs for growth. Unfortunately, if you’re in the manufacturing industry, I would suggest waiting until imports from China can resume. But, for most other industries, now is a good time to buy based on the current market.
What to Watch Out for in the Buying Process
The buying process isn’t simple. There are plenty of pitfalls to avoid. Before buying the property, make sure you have a very thorough inspection done. Get a roofer on the roof. Have an HVAC professional look at all of the ductwork and heating and cooling systems. Make a list of all of the major building systems and have each one inspected thoroughly, by an expert.
Make sure you fully understand your loan. A commercial real estate loan is different from your typical residential loan. The bank that took care of your home loan isn’t necessarily the right bank to work with for your commercial loan. Before choosing a bank, shop around to find the best bank for your business.
One common mistake is failing to check zoning laws. A building might be the perfect setup for your manufacturing warehouse. But before you get too excited, check the local zoning laws. The last thing you want to do is buy a building, fit it out for your company, and then discover your business isn’t allowed to run in that area.
Why You Need a CRE Agent
While you aren’t required to work with a CRE broker throughout the process, I highly recommend it. CRE brokers have access to more information that is available exclusively to agents. For example, I have access to broker only listing sites for properties that you can’t just find on a simple Google search. There are very few sites that list commercial real estate for free.
When you work with a CRE broker, you get to work with someone who has the expertise, knows the market, and knows what a fair price is. Buying a commercial building isn’t an easily acquired or well-known skill. Attempting to buy a building without professional help is akin to trying to build your own home without ever having used a hammer. Maybe you could pull it off, but your house would probably fall down in the next few months.
At Blackwolf Commercial, we live and breathe Frederick and Hagerstown commercial real estate. We have a deep understanding of the CRE market based on decades of experience in the area. Buying commercial real estate doesn’t have to be painful, and when you work with Blackwolf Commercial, it won’t be. If you’re looking into making the leap from business owner to building owner, get in touch with us today.
We’re happy to help you find the best building for your business.