The first office space we rented was owned by two brothers who were contractors/developers. Our space was basically an old loading dock. We signed a lease for seven years.
We proceeded to have the loading dock filled in with dirt and then had a slab poured so we had a level floor to work with. Building office space for our company followed.
It turned out pretty nice. Then, a couple years in we realized we were contractors who were paying rent to other contractors. Wouldn’t it be better to pay ourselves rent? And why did it take us so long to realize that!?
So, we started looking for property.
Location, location, location. This may or may not be a good time to buy. Property prices currently vary widely by local market, so It depends on where you are, and on how saturated the commercial real-estate market may or may not be in your location. Engage a real-estate professional that specializes in commercial properties and take the time to do your research.
In a down market, property should cost a bit less. Right now, this is the case for some markets, but not all and not forever. Interest rates have risen, and are likely to rise again. This means there is less buying competition now, which can play to your advantage if you have cash to invest. If you don’t, and have to lean hard on financing, crunch the numbers. If you don’t come out cash positive on a monthly basis, retreat and revisit buying in the future.
Move forward with caution. If you decide to move forward with buying property for your business, here are suggestions you might keep in mind:
- Form a limited liability corporation that will be the owner of any real estate you buy. That will make it less likely that someone, who is hurt, etc., on the property you bought, will be able to sue you personally or your remodeling company. Run by your lawyer, accountant, and insurance provider any document you create to form the LLC before it goes “live,” to make sure they think it looks good.
- Find and work with a good real estate professional who is a fit for you and always be looking. We worked with a real estate professional for almost two years before we found the right property.
- Arrange an SBA loan sooner rather than later. Being pre-qualified before you shop is good. This process will be easier the more solid your relationship with your banker is.
- The two homes we owned and lived in in the Bay area and our business property were all purchased from the adult children whose parents had died. In all three cases, the properties sat on the market for a while, because the adult children had priced them too high and were getting no offers. We would check the current price every couple of months and then make an offer. Eventually, there would be a meeting of the minds. And all the properties required work, over time, to make them what we wanted them to be. That was not a problem, given we were remodelers. In other words, always be looking, be patient, and be prepared to improve what you buy.
- Build into your remodeling company’s overhead the rent the company will pay you for the building space and/or land you own that the company uses. Check rental rates of similar properties. Charge your company a slightly higher, but still reasonable, monthly rate, as a way to earn more from your company without increasing your salary.
- If you are going to buy a new property be very realistic about the cost of remodeling work that will be needed. Add a substantial contingency, too. No matter how much you plan to spend, you will likely spend more. Being a landlord is a pain, but owning property which includes some space you can rent helps get the mortgage paid.
- Depending on your business, you don’t necessarily need to buy the “best” location.
- Be careful. Be deliberate. Do a proforma, laying out all costs before making an offer. Use subcontractors for any required work as much as possible and have them give you fixed bids. To the extant you can, don’t use your own employees working by the hour. Have them do what you pay them to do, which is to remodel other people’s homes so your company can make money.
In our case, we bought three contiguous parcels on a corner during a recession. Over time we had four condominiums built on one parcel (by a builder who gave us a fixed price), and remodeled the existing office space on another parcel (above where our offices were), and an existing warehouse on the third. Those properties appreciated substantially over the 24 years we owned them. Yes, we invested money in improving them, but we also benefited from the gentrification of the area, something we anticipated might happen when we were looking at the property.
As for the space we were leasing, we sublet it to a custom window company we worked with. At the end of our lease term, the window company started renting from the brothers. As far as I know, that company is still in that space.
You don’t need to take the same circuitous path to real estate ownership that we did. But whichever path you take, tread carefully.