Is Buying Commercial Real Estate Right for Your Small Business?
Although most corporations tend to lease their buildings, there are situations when buying a commercial property could be an excellent investment for your small business.
Prime Small Business Candidates for CRE
When purchasing commercial real estate (CRE) for your business, the following criteria could determine if it is logical and if your company is eligible for financing. It would be best if you had a realistic expectation for long-term growth concerning the physical space your business will need. It is generally more beneficial to purchase a building you plan to use for many years. A CRE purchase also might make sense if it can provide tax benefits for a small number of principal owners.
Privately-owned companies typically tolerate real estate asset depreciation better than publicly traded companies. Businesses that report to shareholders are generally better off with a building lease. Your company should be in operation for at least five years, and two of those years should show a profit. Ideally, the year-to-year trend should show an uptick in annual revenue.
Financing Options for Small Businesses
There is no one-size-fits-all answer to the best way to finance a commercial real estate purchase. Fortunately, several avenues can offer certain advantages, depending on your circumstances. One option could be to purchase the building outright with your cash reserves. Of course, how much it would take could make or break the deal. If your working capital is substantial and the purchase would make a dent of only 15% or so, buying the property could make a lot of sense.
If your company has a long-standing relationship with a bank, and have the cash for a more substantial down payment, a conventional loan may be optimal. Since you are already a known entity, the bank is likely to be less demanding during the application process. The Small Business Administration has stepped in to help guarantee loans made by financial institutions to companies that fit the criteria for a “small business” classification. These loans come with low fixed-interest rates, small down payments, and are available from many lending establishments. You can also pay for improvements to your real estate with an SBA loan. Also known as hard money loans, third-party financing can be available quickly and easily. An individual with cash to invest can get a high return on loan and hold your property as collateral.
Lastly, you might finance the purchase directly through the seller. You can often come to a more flexible agreement than with a bank, and sometimes with no appraisal or environmental report required. After careful research, you may find that purchasing commercial real estate is a great way to increase your company’s overall valuation.