The ultimate guide for business owners considering buying real estate right now

The ultimate guide for business owners considering buying real estate right now

2/28/2021 7:01:00 PM

The ultimate guide for business owners considering buying real estate right now

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, rent for retail space in New York City fell as low as 25% in the fall of 2020 compared to the fall of 2019.While market conditions may change in the short term, the decision to buy property should be a forward-looking one. Consider the size of the space. Will it comfortably house staff for at least a decade? asked Ami Kassar, the CEO of the leverage advisor and brokerage firm MultiFunding. If an entrepreneur feels they're close to outgrowing their current space, it's likely not the right property to buy, Kassar added.

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If entrepreneurs' financial situations point away from buying property, they should consider asking their landlords to renegotiate the terms of their lease, Grant Cardone, an entrepreneur and real-estate investor, said. Given the market, it would be wise to adjust the values even if the plan is to continue renting, he added.

"You want to use this market and opportunity to go to the owner and renegotiate the lease," he said."Even if you're able to pay the amount, the marketplace is adjusting around you and that lease should come down in value."Write a financial plan to determine whether it's smarter to invest in a property or in the business

An entrepreneur's financial situation is largely going to dictate what opportunities are available for buying property. First, founders should determine how much capital is necessary for their startups' growth, said Christopher Mahowald, a lecturer in management at the Stanford Graduate School of Business. 

Once that figure is set, weigh whether the relative rate of return would be higher if you invested that funding into property or into the business itself, Mahowald said. Would hiring a marketing expert or programmer make more money for the business than owning an office building? 

That answer can vary, depending on the risk associated with a particular business plan, but generally investments in businesses, such as additional staff or equipment, earn a higher rate of return, he added. "In order for it to make sense, you must have enough access to capital so you're not capital-constrained," Mahowald said."Or so you're not choosing between investing in the business or in real estate." 

When weighing a substantial investment like leasing or buying, Cohn suggests laying out a 10-year budget plan."If you are thinking of buying or renting, then you need to lay out a long-term budget. That will define how much space you will need for the next 10 years," she said."Ask yourself: How much cash do you have for an investment property? Do your current financials support a mortgage?"

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Farmgirl Flowers' founder Stembel said she always kept a five-year financial plan handy. So when interest rates dropped and her cash flow increased, she saw an opportunity. What's more, rent and mortgage rates for an office building in the Bay Area were the same price.

"It's not rocket science," Stembel said."If I'm going to spend the same amount in rent as I would on a mortgage, why would I rent?"Weigh the other benefits of buying, including diversified revenue streamsAs Stembel sought to increase her company's worth, she drew inspiration from McDonald's. The fast-food chain owned about 80% of its restaurant buildings and 55% of the land for its restaurants in 2019, which it attributes to its success, the company's latest annual report said.

Stembel, who aims to buy additional warehouses in California and Ecuador, hopes the decision brings value to her business. She's considering renting out any unused space, a tactic that can help entrepreneurs diversify their revenue streams. Consider properties where your businesses can occupy between 30 and 50% and rent out the remaining to other tenants, Cardone said. 

The properties could serve as collateral if Stembel applied for a loan or line of credit, she said.When choosing a location, consider these factorsIn 2021, anyone considering a property investment should think of the health risks of COVID-19, demographic shifts, recovery from the recession, and climate change, a January

reportby the commercial real-estate brokerage CBRE found.Taking those factors into account, CBRE laid out 11 US counties (all secondary markets) best positioned over the next decade, including Ada County in Boise, Idaho, Franklin County in Columbus, Ohio, and Polk County in Des Moines, Iowa. Here's a breakdown of the location drivers they consider.

1. COVID-19 riskHealth risks will continue to play a role in economic resilience. Because of this, purchasers should consider"population density, public transportation, indoor crowd-driven entertainment and remote work," the CBRE report said.

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2. Demographic shiftsAccording to CBRE, the trend of millennials moving away from major cities will continue, as affordability makes smaller cities more desirable.James Chong, cofounder of generator seller Top Generator, set up his offices in White Plains, New York, 30 minutes north of Manhattan."Our office location minimizes costs but keeps some of the benefits of staying close to New York City," he said.

Entrepreneurs should also consider their space requirements, Ginsberg said. Are they looking to buy a manufacturing facility rather than a showroom? Can they save money by choosing property in more rural areas over expensive city streets? Should they factor in transportation options for employees? These factors can dramatically change the exact location and price of the space, he said.

Then, get even more granular about where — in a particular city or region — your customers will be. Would your business benefit from an area with heavy foot traffic, where customers may be shopping for similar products or services? Or would the company benefit being closer to a competitor?

3. The state of the local economy as it recovers from the pandemic-led recessionThe economic impacts of the pandemic will ripple through the country for years to come, requiring what CBRE calls"more than a temporary 'ride out the storm' approach."

Red flags to look for in a market include a high widespread foreclosure risk, a local government that is spending more money than it's making, and a high dependency on one industry.It's important to look at markets that can provide an array of opportunities, including access to established resources such as machinery or networks of like-minded people, Ginsberg said. For example, Newlab, in Brooklyn, New York, is a technology center that supports more than 800 entrepreneurs, inventors, and engineers, its website said.

"They have the facilities they need and are part of a community," Ginsberg said."They can benefit from interactions with other entrepreneurs who can help them solve problems."In addition, Ginsberg said, consider the benefits of joining an ecosystem or cluster of startups. Well-known hubs like Austin, Texas, often see transplants from the Bay Area, but smaller cities, like Reno, Nevada, and Boise, Idaho, are also building reputations as hospitable business climates.

4. Climate changeCBRE suggested that business owners take climate change into account when sourcing out a location.Take the West Coast, for example, where some local markets were devastated by wild fires in 2020. The LA Times reportedthat Glass fire, a wildfire that burned through Northern California in September and October 2020, had destroyed at least 246 commercial buildings in Napa County alone. 

"Issues like sea-level rise, wildfires and severe storms, often worsened by the effects of global climate change, are increasingly important when evaluating overall market risk," the report reads.5. Evergreen factorsAs CBRE points out, there are also fundamental factors, those that are still important despite current changes, to take into consideration when picking a location remain the same. Things like being near an airport, universities, and other major forms of transportation are still important to a bustling local market.

"Despite the recent focus on change, many of the same factors that have driven business decisions in the past will maintain their importance," the report said."Proximity to major university systems, especially those graduating sizable pipelines of STEM talent, will still be valued."

As Stembel hunts for a warehouse location in California, she's conducting an analysis that examines the cost of shipping from various ZIP codes, proximity to airports, location of ports, minimum-wage rates, and tax rates.Make a list of 'must-haves'

Entrepreneurs thinking about buying must also identify the specific factors they require in a space, Ginsberg said. Will the property house offices or a warehouse? Does the space need to be climate-controlled or close to suppliers?For Stembel, building a space that meets her needs could be cheaper than developing an existing space. She's hoping to include on-site childcare for employees at her warehouse facilities, which keeps flowers and supplies, but state laws require that the two buildings be a certain distance from each other.

Meanwhile, Top Generator's Chong wants his new warehouse to store more inventory as part of his business strategy. Instead of housing fewer portable and solar generators and quickly distributing products — which results in lower profit margins — he wants to carry more devices to boost margins.

Finally, how to fund a real-estate investment Entrepreneurs looking to finance the purchase of property have options. They can seek out conventional loans at banks, though the terms might fluctuate depending on the lender, Kassar from MultiFunding said. Most conventional loans require 20% down, and entrepreneurs should expect to provide the past three years of federal tax returns.

Additionally, there are two programs through the Small Business Administration that can assist entrepreneurs. The first is the504 loan program, which provides long-term, fixed-rate financing of up to $5 million to promote business growth.Eligible companies must be for-profit, have a net worth less than $15 million, and have an average net income of less than $5 million after federal income taxes for the two years ahead of an application. The loan can go toward the purchase of existing buildings or construction of facilities.

The7(a) loan through the SBA, which Stembel used to buy her property, can also help entrepreneurs. There are two types of 7(a) loans: the standard, with a maximum loan amount of $5 million, and the small, which cannot exceed $350,000. Eligibility depends on approval from the SBA. 

"Interest rates are so dirt cheap right now," Kassar said, adding that government-assistant programs for business owners are another financing option."If you can afford it, and you've got the liquidity to do it, it's a great time to purchase real estate."

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