Read more at http://www.calculatedriskblog.com/2014/08/q2-2014-gdp-details-on-residential-and.html#jT6ZS3qbBE1FUhSW.99
6
By Chinwe Onyeagoro, CEO, FundWell
“Everything should be made as simple as possible, but not simpler.” -Albert Einstein
Purchasing commercial real estate is huge decision that has far reaching impacts on your business’ cash flow, balance sheet, and funding options. So it is really important that entrepreneurs take their time and carefully consider when and why it might make sense to stop renting and invest in commercial property.
A recent report on Small Business Financial Health released earlier this month by FundWell, in partnership with the Federal Reserve Banks of San Francisco and Chicago as well as Pepperdine University, found that only 22% of businesses with excellent financial health had cash available from operations to invest in commercial real estate. In other words, even businesses that are top performers require some third party financing to buy commercial property. That being said, most lender and/or equity investors that a business owner approaches for funding to invest in commercial real estate will want to see that the following five conditions are met:
1) Set Long Term Space Needs – Before you lock yourself into one retail, office, or industrial property, you should have a firm handle on how much physical space your business will need to operate over the next three to five years. Given the time, energy, and costs associated with making this type of investment and building out the space to meet your needs, the last thing you want is to outgrow it after just a year. So if your company is still expanding – staff, customers, and/or products/services – and you cannot confidently project how much space your business will need to operate within the next two to three years, then you should consider waiting until you have a better handle on your future size and build out requirements before you buy.
2) Show Historical Profits – A commercial property is a long term business asset. Entrepreneurs that are in the best position to make investments of this type are those that have a proven business model and a track record of profitability. A business that is profitable typically pays business taxes and has excess cash at the end of each year that can be used to reinvest in the business. Typically businesses that have only been profitable for one or two years focus on reinvesting in business operations to ensure the company has the marketing and business development talent and other staff, inventory, and furniture/fixtures/equipment to support growth. However, by year three and four of profitability, business owners are in a strong position to begin investing in longer term assets like commercial property.
3) Build Cash Reserves – Buying commercial real estate takes “cold hard” cash. When you make an offer to acquire a commercial building, you typically need to provide a cash deposit to demonstrate to the seller that you are serious about completing the transaction. Deposits can run anywhere from 1 to 10% of the total negotiated purchase price of the property. For example: In the case of a retail café that you get under contract for $500,000, the “out of pocket” deposit that you will need to pay is anywhere from $5,000 to $50,000. And even after you get the property under contract, in order to get a loan to complete the purchase an entrepreneur typically needs to show that you have between 10% and 40% of the purchase price available in your bank, money market, and/or investment account to satisfy a prospective lender’s down payment requirements.
5 Reasons to
Buy Vs. Rent Commercial Space