Refinancing a commercial real estate (CRE) property or purchasing a property where you operate your small business might seem intimidating.
But if you do it right, you can build your personal net worth and strengthen the bottom line of your business.
According to a FitSmallBusiness financial expert, if staying in a building for more than 7 years, you are generally better off buying than leasing (from a purely monetary standpoint). The longer you stay in the building the more the cost advantage for buying increases.
Aleks Flom shares his insight as a specialist on the SmartBiz Loans CRE team. "Purchasing a commercial space for your business not only reduces the risk of rising rents in a growing market but also helps create long term net worth through building equity in a piece of real estate".
Here’s information you need to know about owner-occupied CRE purchases.
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Advantages of a CRE Purchase
1. Leasing Can Cost You
Under certain circumstances, leasing can hurt a small business. Flom says:
“I’ve seen small businesses sign a long-term lease for spaces they quickly grew out of, and on the flip side, where a small business owner had huge growth plans, and took on a space and lease far greater than what was right for them at the time.”
Rising rent rates can cut into cash flow.
2. Property as an Income Generator
In order to qualify for a SmartBiz SBA loan, at least 51% of the property's square footage must be occupied by, and used by, your business. That remaining space can be rented out to other businesses, generating income to offset the cost of your mortgage and maintenance. If you’re not thrilled about the idea of being a landlord, hiring a property management company is a good option.
3. Save a Bundle with a Refinance
Pro-Glo Auto Finish and Glass Inc. is a family owned and operated auto body repair shop in South Carolina. The SmartBiz team recently helped take their maturing 5-year loan with an upcoming balloon payment and turn it into an affordable 25-year fully amortizing solution. Along with the refinance of the property, the SBA loan proceeds were used to refinance existing small business debt. This helped cash flow, putting the owners in a much stronger financial position.
“We’re not facing any future balloon payments. It’s a big relief,” said their office manager who worked with SmartBiz during the application process. The total loan was for $620,000 with monthly payments of just $4,089.95.
4. Tax Savings
Unlike rent, money used to purchase real estate is not deductible. However, depending on several variables, tax advantages exist for owners of commercial real estate. Before your purchase, sit down with your accountant or financial advisor to discuss reducing your tax liability.
5. Appreciating Land Values
If you’re purchasing a commercial real estate in an area of appreciating land values, you can come out on top if you sell the property down the line. Although no one has a crystal ball that reveals future land value, you can get a good idea of appreciation from historical data.
6. Great Rates and Long Terms are Available
An SBA loan is generally seen as the best option for qualified borrowers. SmartBiz Loans CRE SBA loans are available from $350,000 - $5 million. With rates from 5.50% - 6.75%* and a 25 year repayment term, low payments won’t crunch your cash flow.
Disadvantages of a Commercial Property Purchase
1. Costs of Building Ownership
As the building owner, you are responsible for all utilities like electric, gas, water and waste. You’re also on the hook for property taxes. Depending on the value of your building and location, this can be a substantial chunk of change. No more calling the landlord if something breaks or needs an upgrade. You’ll pay for all maintenance and improvement costs. Commercial Property Insurance protects your business against damage to buildings and their contents from fire, theft, and other hazards. You’ll need to have the proper policies in place if you own.
2. Upfront Cash Can Inhibit Growth
The monetary cost of owning a building is not the only consideration. If the extra upfront cash you invest in buying hurts your ability to grow your business, renting will be your better option.
With every investment, there are numerous risks related to CRE ownership. These include property value declining due to the economy or market, financing risks, and expenditures for repairs and maintenance that are not anticipated.
If you are ready to purchase commercial real estate, here are steps to take before you sign on the dotted line.
- Determine the location, size and cost of the real estate you need for your business
- Get out the calculator. Make sure you have the cash flow and funds for a down payment and subsequent monthly payments and compare the costs of owning vs. renting. It’s a good idea to work with your accountant or another financial professional to pull together the numbers you need to make an informed decision.
- Obtain the best possible financing package for your CRE purchase. If you are eligible, an SBA CRE loan has a low down payment and provides long-term financing at low rates. Eligibility requirements include time in business, profits, cash flow and a healthy credit score. Work with a lender who has a Better Business Bureau certification, excellent customer reviews, transparent pricing and top-notch customer service.
In conclusion, Flom notes, "Leveraging an SBA loan to purchase or refinance a commercial property for your business helps add flexibility with a long-term, less aggressive payment while eliminating the business risk that comes with a ballooning loan option. The right loan helps small business owners get into a favorable credit product to improve their cash flow, and build wealth."
* Loans have a variable rate of Prime Rate plus 1.50% to 2.75%.
Do you need extra funds for your small business? An SBA loan is the best bet for small businesses with low rates, long terms and low monthly payments. Visit SmartBiz Loans® today and discover in about five minutes if you’re qualified to apply for an SBA loan with one of our bank partners. Check out our great reviews on TrustPilot!