Friday, July 29, 2011

A Good Time to Buy Commercial Property

It is a good time to buy commercial property. Loan rates are low; pricing is all over the place but deals can be had. With depreciation in value, those who purchased in 2005-2006 real estate boom years are motivated to sell. Some of these were investors who purchased with cash looking to pull their money out. Others are near the end of a loan which needs re-financing. And others may be in default of their loans, under pressure from their banks to sell even if the sales price will not fully pay off the debt ('short sale' scenario).

Are you considering buying a commercial property?

By purchasing commercial property, you build equity in an appreciable asset that also offers multiple tax advantages and income-sheltering opportunities not available with leasing. Below is from a blog I previously posted, but still relevant today. In light of current market conditions, well worth a re-post.

Here is a list of factors to consider when evaluating the purchase of a commercial property.

FACTORS TO CONSIDER IN MAKING COMMERCIAL PROPERTY PURCHASE DECISION

Location/Site Considerations
  • Is it in a thriving neighborhood?
  • Is it in a commercial district that's popular and full of tenants, or half empty?
  • Are prices trending up or down?
  • Has the building been well-maintained?
  • What business image equity does the building offer?
  • How long you plan to stay in the space; will it be long enough for the property to appreciate in value? If not, could you easily rent it out to a tenant if you move?
Property Management
  • Will you hire out property management or do it yourself?
Opportunity Cost
  • What is opportunity cost of money used as deposit to purchase a building?
  • What return would you expect to receive on that money compared to the return you would expect to receive if you invested the money back into your business or other investments?
BUY Vs LEASE CONSIDERATIONS
  • Cash Outlay - Down payment of approximately 25% of the purchase price, depending on the lender and buyer’s credit, vs. lease space with good credit, typical outlay is the security deposit and first month’s rent
  • Fixed vs. Variable Cost – With purchasing, costs more stable over long run, especially with long-term, fixed-rate mortgage. With leasing, the market dictates rent costs over the long term.
  • Growth Considerations – Leasing allows more flexibility and fewer growth constraints for newer companies or those in high growth mode. If company is mature and stable, or buys bigger building and rents out additional space, buying can not only meet future space needs, but offers another source of income.
  • Appreciation – In purchase, generate long-term increase in value through market appreciation.
  • Tax Factors - Lease payments are usually fully deductible, but many expenses of owning office space must be written off over longer periods of time of up to 39 years. Depreciation on the improvement portion of the property and can usually deduct all interest payments. When considering the tax factors it is essential to consult an attorney and tax professional about the legal and financial considerations of owning office space.

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