Operating your business from a leased building may currently seem like the right move; I mean, you have your own business and staff and make a decent profit at the end of the day. However, If your business is mature and you have stabilized cash flow, or if you have the investors or have saved the necessary funds, you may not want to pass of the opportunity to buy the property your company operates from.
Purchasing a property for business purposes is a big decision that requires care and planning to execute, and how you go about it depends heavily on your business model, industry, cash flow as well as the all important real estate investing metrics of; location, timing and financing. In the perfect situation, an investment into commercial real estate, this is a step in the right direction, and its benefits can start materializing in your bottom line within the first year. In this piece, we will outline why you should purchase your business real estate, the advantages, and other factors that you must consider before buying.
WHY SHOULD YOU INVEST IN COMMERCIAL REAL ESTATE
Real estate has been a profitable investment in the United States for a long time as it has appreciated at a similar rate to the public market while also being able to support leverage, which is not advised for the public markets. Perhaps even better than single family homes and more conventional real estate is commercial real estate because you acquire a property to enable you to expand and grow your business at the convenience of your privately owned space.
Some of the businesses that have high overhead due to rent payments are retail, hospitality and manufacturing. It may make sense for these businesses to invest in owning their property. It will likely be a cash flow burden for the first few years, but in the long-term, you will actually be increasing your net margin by not being subject to rent hikes.
Numerous benefits come with such an investment; it allows you to gain tax advantages, build equity, and have flexibility in how you run your business. Let us take a look at some of these benefits.
HOW PROPERTY OWNERSHIP MAKES CASH FLOW MORE PREDICTABLE
Many cyclical industries such as construction can have years where they do very well and with no wrong-doing, come up short on their bills the next year. All it takes is one economic downturn to squeeze the majority of these companies out of business.
While owning your property is not a cure-all, it will allow you to build equity in your real estate. Equity that you can tap into in order to service your debts should your business slow down. This way, you are not subject to your landlords good graces.
Should you choose to rent your property instead of owning it, you will likely need to renegotiate terms of that contract with the landlord or fall behind on your rent payment. Of course if you fall behind on rent payment you face eviction and your business may shut its doors forever. If you find yourself in a situation where you can’t service your debts when they fall due, there is a whole industry around renegotiating those debts or acquiring distressed businesses.
BENEFITS OF OWNING YOUR BUSINESS PROPERTY
- Fixed Mortgage Payments Ensure Lower Costs
If you can take care of your monthly mortgage payments for ten years or even more, your costs will suppress, enabling you to shield your business from rent increments from the owner of the property. No one has the right to increase the rate of your property anymore since it’s yours. You have to make a down payment instantly, but in the long run, it is a worthy sacrifice for the financial and business freedom, it guarantees you as opposed to being a tenant.
- You Can Cash Flow The Investment
The type of real estate, commercial loan restrictions, size of property and the business you operate as an entrepreneur may allow you to rent some parts of your property out to other business owners. This would obviously allow you to earn from your property while carrying out your business simultaneously. As long as you are comfortable being a landlord in addition to a business owner, this scenario is worth entertaining. ]
- You Can Customize The Property According To Your Needs
When you run your business on a lease, you encounter numerous zoning, environmental, landlord, and other limits on what you can or cannot do on or with your property. This limitation is especially a problem if you are a manufacturer because your facility needs to go through significant customization to ensure a convenient and free flow of operations.
With this factor in mind, it is imperative to explore the regulations, surroundings, and other factors that affect the property before you make your purchase to know if it is the required location for your business type. You can interact with residents in the environment, check the local government, and other activities that will give you insight on the legal responsibilities to make before you make purchases.
- You Really Are In Charge
Owning a business puts you in charge of your source of income. Owning a business under lease puts your landlord in charge of how you operate to earn that income, which means, regardless of being your own boss, you still have one above you. But when you own your business real estate, you are the only one in charge of how you operate in your building conveniently without having to answer to anyone if a doorknob pulls out or if your equipment causes a dent on your wall.
WHAT TO CONSIDER BEFORE INVESTING IN COMMERCIAL REAL ESTATE
There are different strategies you can employ when you want to buy your business real estate because of the business you intend to operate and the building you would like to purchase. Still, there are some basic rules and guides that small business owners can adhere to. Endeavor to ask yourself the essential things before proceeding; your goals should be crystal clear and be confident of what you are doing.
- Can Your Business Afford the Mortgage?
This question is a no brainer, but it is the most important, ensure your business is worthy enough for you to purchase a property for it in the first place.
- What Sort Of Property Do You Need?
The first question leads to this one; after ascertaining the sort of business you intend to do, you have a clear picture of where you want to do it, which automatically gives you an idea of the kind of property to look out for.
- How Risky Is Your Market?
You have an idea of the sort of property you wish to run your business; you need to be true to yourself and be aware of how much work you are willing to put in to acquire that property and maintain it in the long run. Even if the property purchased is brand new, you have to be ready to maintain it and keep it up to date in the long term, as it will eventually wear out.
- Is Your Business Stabilized?
This question is essential mostly when you are an upstart because you may not have an already established workforce, which means that you need to check yourself to see how much you are willing to part with to get the best hands to work with. While considering this, you should also put your own skill strength into consideration because it is unsafe to be under-skilled around your staff; you can go for further training to get yourself ready.
TAKE ALL THE RIGHT STEPS
After doing all your homework and asking all the right questions, you need to take the appropriate step right before making any purchase. You have to confer with experts in your local industry, real estate market and also find out the local regulations before you get involved.
It may be scary to take out a large mortgage on a piece of property and even scarier if you are new to running your business. However, buying your business real estate gives you total freedom to run your business in your space as you see fit without compromising the services your clients receive. If this is something you have been considering, then you have your answer, you should buy your business real estate.
At Minerva Equity, the majority of our portfolio companies owned their real estate before we acquired them. Having this extra asset on the balance sheet makes them a more stable investment and makes financing the purchase easier as well.