Deciding When to Buy Commercial Real Estate
Purchasing real estate for your business may be one of the biggest decisions you make as a small business owner. It’s also a big commitment that requires significant planning and research if you want to achieve a significant return on your initial investment.
Besides targeting areas where your customers, clients and employees are most likely to live, work and shop, other less obvious but important elements should be considered in your decision-making process. From conducting an analysis of nearby competitors, to understanding local zoning laws, where you choose to plant your real estate roots will have an impact on your business for years to come.
Budgeting and Financing
Sticking to your budget should be one of the top considerations when purchasing commercial or industrial real estate property. Being realistic about what you can afford and educating yourself on the financial obligations involved in managing real estate will help prepare you for the purchasing process.
For instance, one of the biggest expenses for businesses is employee compensation. While the federal minimum wage for employees is $7.25 per hour, your state’s minimum wage requirement could be higher. For example, minimum wage in the state of California is $8.00 per hour. Check the Department of Labor’s list of minimum wage rates for U.S. states and territories.
Be sure to research loan programs, such as the U.S. Small Business Administration (SBA)’s 504 Loan Program, which provides long-term, fixed-rate financing to small business owners interested in buying or renovating commercial real estate. The 504 Loan Program also applies to small organizations looking to purchase equipment to expand their businesses.
Location and Property Value
Ideally, you’ll want to choose a business location that will attract foot traffic and appreciate in value as the surrounding neighborhood adds commercial and residential tenants. Nevertheless, keep in mind that while trendy locations are appealing, gentrification can unexpectedly stall due to socioeconomic factors outside your control.
To zero-in on a location that is close to your customers, suppliers and vendors, consider the following factors when researching potential property sites:
- Choose a location where parking is both convenient and easily accessible. Make sure the property complies with laws such as the Americans with Disabilities Act.
- Select a location that has a healthy labor market, thus providing a steady stream of potential employees who would be willing to commute to your business.
- Research the neighborhood crime rate. Your employees will need to feel safe if they’re alone in the building or walking to their car during late night hours.
- If your business relies on the supply and delivery of commodities, such as clothing, food or other raw materials, locations near shipping ports and railways can reduce transportation costs and shipping times.
- Be aware of your state’s income and sales tax rate, which can reveal whether operating your business across nearby state lines is less costly.
A commercial space may need work – for instance, installing IT systems, fixtures and office equipment – before it is business-ready. Moreover, if the property shows a lot of wear and tear or is burdened with public health issues, such as asbestos, then buying a pricier but better-maintained property may be worth the investment.
Also, investigate zoning laws that govern allowable uses for commercial and industrial space. Local zoning laws can limit your business activities as well as impose restrictions on changes or alterations that you make to the property. For example, historical areas are sometimes subject to zoning restrictions on alterations that can be made to the building’s facade.
Research and Planning
Ultimately, the decision to purchase real estate should include all of the aforementioned factors as well as growth forecasts on both your business and the overall real estate market. For this valuable data, you’ll need to sit down with a real estate expert to discuss the costs and tax benefits of buying versus renting commercial property.
To help you determine whether purchasing real estate is an ideal investment, assemble a team of advisors that include:
- An accountant who will help you determine what you can afford as well as analyze the tax and operating budget benefits.
- A commercial broker who can easily identify potential properties within your budget.
- A lawyer who can guide you through the real estate process, from negotiation to sale, and act on your behalf with the seller and lender.
- A mortgage broker or lender who will present a variety of financing options, such as the SBA 504 Loan Program or other state-specific small business loans.
Partnering with a small business counselor or specialist can also be advantageous in identifying local programs that support small business investments. Remember to speak with other local business owners and potential co-tenants to augment your search.
Regardless of what real estate property you end up buying, it should be consistent with the demographics you wish to target and the brand image you want to promote for your business.