a blog from CenturyLink

Is now the right time for your small business to buy real estate?

by | Jul 5, 2022


During the pandemic, commercial property interest rates dropped to historic lows. However, they’ve made a swift recovery and have nearly roared back to pre-COVID-19 levels. This raises an interesting question. Before the commercial real estate market recovers completely and the federal government raises interest rates again, should you take advantage of this golden opportunity and buy a piece of real estate for your small business?

After all, the government has created several programs to help small businesses acquire commercial property. The U.S. Small Business Association’s 504 loan program is particularly attractive in the current economy. So if your business is doing well and your current lease is about to expire, you may want to consider buying commercial office space rather than shelling out your hard-earned cash to a landlord year after year.

Of course, some complex challenges arise when you decide to purchase your own office space. For starters, buying commercial property can be very complex, even for real estate professionals. The process is very different from buying a single-family home, which is complicated in itself. It takes much more time, along with intensive research and planning. Therefore, it’s no surprise that today only 35% of small business owners actually own their office spaces.

But if you’re ready to take on the challenges of purchasing commercial property to open a new chapter for your business, here are five reasons you should consider buying rather than owning in 2022.

Your property will likely increase in value over time

Real estate increases in value over time

Like any other investment, under the right circumstances, the potential rewards can be great if your property appreciates in value. Of course, you need to consider many factors when forming a real estate strategy for your business. Cash outflows, tax implications, overhead costs, and neighborhood property values are all important variables. Location is especially important because commercial properties in prime areas will return between 6% and 12% annually. This is significantly more than the 1% to 4% annual return on residential property. And the technology infrastructure is essential. You need to ensure you are in a place where you get high-speed internet access—preferably fiber.

You may be eligible for financial aid from the government

The SBA’s 504 loan program offers some excellent commercial real estate opportunities for small businesses. If your business is approved under this program, the federal government guarantees a portion of your loan. This benefits you in three major ways by giving you:

  • A reduced down payment. You’ll only need to put down 10% of the price of the building, compared to 20% to 40% with a conventional bank loan.
  • More money. Thanks to the government’s guarantee on a SBA 504 loan, you can typically get more money than you’d get from approaching the bank yourself.
  • Waived or small personal collateral requirements. Because the property you purchase with the loan will probably be used as the collateral, you won’t have to pledge your home or any other personal property to secure it. If collateral is required, your liens will be greatly reduced.

As a small business, you qualify for one of these valuable loans if your net worth is under $7 million and your net profits, after taxes, are under $2.5 million. Virtually any type of business that fits these parameters is eligible for 504 financing, including manufacturing, services, or retail operations.

Unused spaces can lead to significant rental income

Real estate for small business

Most commercial real estate loans require you, as the business owner, to occupy at least 51% of the property. Otherwise, the property is categorized as an investment. This means the terms of the loan are quite different, with higher interest rates and collateral often required.

However, if you find yourself with some extra space after you’ve settled into your new commercial property, you may be able to earn additional revenue by subletting the remaining 49%. For example, if your office has little-to-no foot traffic from visitors or clients, you can buy a building and use the upstairs as an office while renting out the ground floor (if zoning permits it) to a restaurant, retailer, or other business. This can significantly reduce your cash outflow and help you pay back your business loan much faster.

You’ll rest easy knowing your rates are stable

If you rent or lease property with adjustable rates, the fees will inevitably increase over time. These increases can be substantial depending on the state of the economy and the local real estate market.

But if you have purchased your property using a fixed-rate loan of 30 years, your office costs are guaranteed stable for the life of the loan. Since your office rental or leasing fees are probably one of your highest costs (after personnel and benefits packages), knowing that yearly increases are a thing of the past can bring peace of mind—especially in difficult times.

You’ll make all the rules for your property

Business people shaking hands on a new real estate deal

When your office or retail store belongs to you, nothing is off limits as far as creativity and customization are concerned (as long as you’re obeying local zoning and construction laws, of course). You won’t have to worry about your landlord selling the building and forcing you to relocate, or deciding not to renew your lease for another year. This will bring peace of mind to business owners who store heavy machinery on their premises, or those who have a unique setup that would be difficult (and costly) to move.

Tax breaks may save your business thousands

The tax deductions you’ll receive for timely interest payments, property depreciation, and non-mortgage expenses are one of the biggest benefits of buying. They’ll allow you to repurpose a substantial amount of your costs as tax write-offs. Also, if you renovate the property by adding a new roof, strengthening the foundation, or enhancing its value in some other way, those costs can also be deducted.

Given the prices of real estate today, you will probably pay more each month for your loan than you did for your lease. But when you consider the money you’ll save on taxes, owning a commercial property can end up costing the same as leasing, with the added benefit of building equity while you use it.

Keep in mind that buying (and ownership) can be complicated

Company deciding on whether or not to buy real estate for their small business.

To make an informed decision, you should consult a team of real estate professionals before committing to a major purchase. You should also analyze the long-and short-term implications of property ownership. For example, should you register the property under your personal name? Or should your business own it? If you haven’t already, you may want to form a corporation or a limited liability partnership (LLC) to hold the property. Such factors impact everything from the down payment to the tax depreciation rate of your loan.

Buying commercial property can bring your business to the next level and open many new doors: You can build equity, stabilize your finances, and have complete control over all decisions concerning property and technology infrastructure. Delving into the ever-changing world of commercial real estate could change your business—and your life—forever.

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