Buying
the building in which you function your manufacturing, submission, or service
business can offer huge benefits. You resolve your "rent" for a long
period of time, you monetize on the admiration of the building, certain tax
benefits may apply, and if the possession is organized properly, you pay
yourself each month rather than a landlord.
But
before you rush out to buy an commercial building, I believe it is important to
determine the true cost of ownership.
Additionally,
leasing a building might make more sense than buying a building if your
company's growth plans will exceed the building's potential in the next three
to five years, if your company is taking operating capital to fuel that growth,
if the business has been unprofitable for two of the past three years, if you
are planning to sell your business in the expected future, or if the possession
of the company has multiple members or is openly traded.
Rick
Lawton has always been very detail-oriented and enjoyed what he does. He is a
professional with vast experience in the military and legal fields. Currently, he
is engaged with LL Reality in social media campaigns. LL Reality is complete
service professional property management business. Once you have determined
that buying is the way to go, what are the TRUE costs of ownership?
Financing costs.
Financing costs.
Until your wealthy aunt
Mabel left you a bundle, chances are you will finance the purchase of your
commercial real estate. If you're curious about the various ways to finance
your purchase, you can read about it here. Depending upon the amount of your
down purchase, you will be funding a chunk of your purchase price. This chunk
will have an interest rate and be paid back over a number of years. A part of
your payment, monthly, will be interest and a part principal. The total payment
is known as debt service. With today's super low interest rates, lock in for as
long as you can. This will fix your servicing costs for years to come.
Property
taxes and insurance.
In
addition to the debts service defined above, you must add in the monthly costs
of property taxes and insurance. In California, property taxes are
approximately 1% of the assessed value. Property taxes are due twice a year in
November and February. Most owners budget for this biannual expenditure by
setting apart the monthly sum. Insurance plan on the property must also be
paid. Generally, you pay for property insurance annually. But, similar to
property taxes, most owners budget for this annual expense monthly.
Maintenance costs.
Systems
within the developing must be managed and replaced once they eclipse their
useful life. Such systems include air conditioning , heating, warehouse
sprinklers, power panels, plumbing, roof, etc. Typically, monthly, quarterly,
or annual maintenance programs are employed but it is smart to build a source
each month in the event one of the systems fails and must be changed. Take a
look at the situation of these systems when you buy the building. I suggest
making a report that budgets major expenditures over the first five years of
ownership.
Return on your investment.
The money
you spend to buy the building (down payment) should be added to other deal
costs such as lender points, appraisals, environmental reports, legal fees, and
source accounts. All of these charges are your investment into the developing.
It is affordable to expect a return on this investment, however meager. Keep in
mind, if you are buying a building to house your business, you and your
business have other uses for the capital - some uses will earn you and the
business great profits.
Miscellaneous costs.
Mowing
the grass, cutting the trees, changing broken sprinklers, cleaning the floors,
discarding of the trash, sweeping the parking lot, watering the landscape, etc.
all are costs that you will incur - even if you have an employee accomplish the
tasks. Account for the expense in your true cost.
The acid test.
The acid test.
Once all
of the costs are computed and totaled, compare your true cost of ownership to
the lease rates for comparable buildings. If the cost of ownership exceeds the
market lease rates by 20%, rethink your purchase. You might be better off
renting.
No comments:
Post a Comment