Buying commercial real estate is a complex undertaking that is difficult even for experts to time right to maximize their investment value, let alone entrepreneurs or business executives whose areas of expertise are in different industries.
If you're thinking about purchasing office space, this guide will help you evaluate the pros and cons of leasing vs. buying, assemble a real estate search team, choose a location, and make the purchase.
There is no one-size-fits-all strategy for purchasing commercial real estate. That decision must be weighed by each business. The following guide will help a small business assemble a real estate search team, choose a location, and purchase property.
Purchasing Commercial Real Estate: Deciding to Buy Versus Lease
When deciding whether to buy or lease commercial real estate, it's important to understand the potential risks. The last thing you want is to buy property and realize a year or two later that you would have been better off renting. Here are some of the potential risks a business faces when buying:
- Location may backfire. Today's "hot" neighborhood can become tomorrow's "not" neighborhood. Locations are trendy. Gentrification may stall. The market may go bust. The area you choose one day may become undesirable the next. Of course, the reverse can be true, as well.
- Loss of liquidity. Businesses may tie up much of their liquidity buying real estate. It's not always easy to sell real estate, particularly in a slump. At the same time, businesses that own real estate at least have something to sell if they need a cash influx to revive a lagging business.
- Tenuous cash flow. Tenants sometimes stop paying their rent. Other times, buildings are in need of unexpected -- and expensive -- repairs. Your cash flow can become compromised, especially if you are forced to simultaneously pay repairs and attorney fees to handle a tenant situation.
In order to be aware of risks, do your homework. Undertake extensive due diligence before signing any contract. You also need to be hands-on with your commercial property by overseeing every level of operation and making frequent on-site visits -- otherwise, you may learn about problems after it's too late to do anything to fix them.
The decision ultimately comes down to the economics. You may want to have a real estate expert help you undertake a rent versus own analysis, taking into account growth forecasts for your business and real estate market trends.