When you’re considering giving up the lease and buying your own building, there’s a lot to think about.
For example, is your company really ready for commercial real estate financing? Just like with residential mortgages, it’s often quite complicated to secure a loan to purchase the commercial real estate of your dreams.
Things to Consider Before Borrowing
Before you jump in with both feet, realize that the choice to rent or buy commercial real estate is a much larger decision than buying a house or a car.
Not only are you going to have to make certain predictions about your company’s future, you’ll also be hazarding guesses about your market and any potential financial benefits that might come down the road.
Ask yourself these questions before you call your local SBA representative or commercial real estate lender:
- How long have you been in business? Most lenders want to see that a company is profitable before giving it any amount of money, so if you’ve not been showing a profit for the last two years, shelve this dream until you have.
For many companies, five years in operation is plenty to realize a profitable track record.
- How much space do you really need? A young business may have lofty goals or underestimate how much room it’ll need in five or 10 years. Instead of buying because you can, wait until your company has matured fully.
This allows you to buy the space you need so you’re not forced to sell your property at a potential loss because you’re too cramped or become a landlord in order to fill a bunch of empty space.
- How is your business organized? How your business exists legally makes a huge difference in the commercial real estate financing picture for a number of reasons.
For example, a publicly-traded business typically doesn’t usually like to deal with real estate depreciation, but a small LLC could give you the advantage of personally taking that depreciation.
Other Ways to Finance
Commercial real estate financing isn’t for every small- to medium-sized company, there are always situations where leasing real estate would make a lot more sense in a business’s budget. However, if you’re determined to buy a property and are having trouble securing financing from a bank, you still have some options beyond the Small Business Administration.
Sellers are sometimes in the position to finance a property for the right buyer, for example. In some markets, this can be a tricky proposition, since you may be rushed through inspection and appraisal phases of the purchase, and may end up with a building that was previously otherwise unsellable.
If you have a family member or friend who is looking to increase their return on retirement or other investments, buying a building for you and then implementing the same type of seller financing can be a lot more attractive. For you, it’s essentially the same as a cash purchase, with all the inspection and appraisal allowances that implies.