Commercial real estate acquisition: 5 tips for success
Read time: 3 minutes
Buying real estate is a costly undertaking, and business owners need to exercise due diligence every step of the way. Without proper planning, entrepreneurs can face a host of problems, including inadequate financing, unexpected construction costs, inefficient layout and environmental lawsuits.
Although real estate costs have shot up in recent decades, entrepreneurs are still usually better off buying properties than renting them. Not only will you not be faced with rent increases, but your property may appreciate in value as well. Plus, a buyer can deduct the value of a loan, mortgage interest or depreciation in the value of a building from company taxes—something that can't be done when renting.
So what makes a successful commercial real estate acquisition? Here are five tips that can help.
1. Understand the local real estate market
Before making a decision on what to buy, entrepreneurs should pay heed to where they're buying. Each local market has its own tax rates, land inventory and environmental issues. The supply of skilled labour in the area also needs to be considered.
2. Consult an accountant
Affordability is a big issue in commercial real estate today, so before you go to a bank, you should work with an accountant to determine your budget. Make sure your budget includes all hidden costs.
Tax implications can also be complex in real estate transactions. That’s why it’s particularly important to consult an accountant who knows the ins and outs of commercial real estate deals.
Your accountant will be able to tell you, for instance, whether the purchase should be considered a corporate or personal transaction. Other issues include succession planning, transition financing and decisions about how assets will be broken up when the business is sold.
3. Get your financing in order
Getting approved for commercial real estate financing isn’t easy.Bankers will want to see high-quality financial statements and evidence that the profits you generate are being retained by your company. All of this will play a big role in determining whether you get the commercial real estate loan you want.
It's also a good idea to shop around for the best financing package. Don’t forget that while the interest rate is important, it’s far from the whole story. Other factors such as what percentage of the purchase a financial institution is willing to finance are equally, if not more, important.
You should also resist the temptation to sway lenders with overly optimistic forecasts—payment problems down the line can boost costs and reduce your manoeuvring room.
4. Plan your layout well
Whether it's an existing building or one you’re renovating, layout has a major impact on operational efficiency. That’s why it’s often a good idea to hire an operational efficiency expert to advise you on how to optimize your layout.
5. Choose the right builders
You should be looking for quality builders who have a good reputation and are responsive to your needs. Key traits of good builders include experience, timeliness and knowledge of your industry.
For example, if your building must meet food-industry standards, your builder should have expertise in that sector. A builder's financial history should also be considered. You don't want a situation, for example, where a contractor is taking your deposit to fund a previous job where they ran out of money. If you have any doubts, do a credit check.