Sunday, July 22, 2012

What Should I Know Before Buying Commercial Real Estate?

Buying commercial property could be a risky undertaking if a potential buyer does not completely understand real estate market trends. A company owner doesn't want to spend money on commercial office space without considering all of its potential effects on the business' operation. Currently, a number of new commercial office space owners have fallen into the trap of buying a piece of land and later regretting that decision.

Purchasing real estate can be advantageous to a company. It is important to consider the possibility that investing in new property will not always bring more profit to recoup the purchase expense. So, always be cautious and take time to do research and analyze the risks compared to the benefits as well as how this decision will affect the cash flow of the business and what the return on investment will be.

Important Things to Consider

Available Cash Often times, buying commercial property involves a down payment of 20 to 25 percent of the total amount of the final price. This amount is usually required before the transaction can be finalized. If making a down payment is not financially justifiable, then it may not be the right time for the business to purchase new real estate.

Mortgage After paying the 20 to 25 percent down, the new property owner must begin making monthly payments towards the mortgage to pay off the remaining balance. The mortgage payment is approximately twenty-eight percent or less of the total income of the qualified borrower. It is critical to calculate the financial capability of the business before buying real estate to be sure a mortgage payment can be handled. If the company does not have enough income to cover this, then buying new property should not be done.

Additional Moving Costs Always examine the location of where the company would like to purchase property. Check the prices and the interest rates to see if they are comparable with the financial abilities of the business. Transferring an operation to a new location often means higher expenses because of the added cost of advertising that the business is moving to a new location so all clients will be aware of the move.

Ideal Investment Owning commercial property is a good investment; however, it is important to ascertain that a company is not spending money on a building that will not allow it to prosper. The owner should ask themselves if purchasing new space will bring in more business to justify this expense or will it cause the business to suffer because of the new large mortgage payment.

Potential Risk of Purchasing Commercial Real Estate

No Future Growth Potential - One risk of purchasing commercial property is that the location of the property may not be in the best area for future growth. The location may be desirable at the present time; however, in the long run it may lose commercial appeal and eventually could significantly impact cash flow and return on investment.

Financial Loss Potential - Another pitfall in purchasing real estate is the loss of liquidity for the company, failure to recoup the return on investment due to a default in payment by a tenant and a decrease in resale value due to a recession.

A business owner should know that before buying commercial real estate, in-depth research must be done to ensure that the company finds the best location for the entire corporate operation. Factors that can affect purchasing new property could be credit scores, company reputation and available cash. If unsure about the decision to purchase commercial real estate, a business owner should not hesitate to talk to a realtor for professional advice. Knowing what to do is vital to purchasing commercial real estate!

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