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I already feel your skepticism. Buy commercial real estate? This year? Doesn’t this guy know that vacancy rates are skyrocketing, unemployment is high and market sentiment is that commercial real estate will be in a freefall as we all continue working from home and shopping online?
Actually, I do, and I want to be very precise with my strong buy recommendation. This article is specifically for business owners who are currently leasing space and who also intend to be in business for at least the next 10 years. If that’s you, the remainder of 2020 may present the best buying opportunity you will see in your lifetime. Consider the following:
This may seem obvious, but unless you’ve set up shop in your home, every business needs space to operate. You’ve already decided to be in business, now you must choose to either rent or own your space.
Real estate rental costs are typically the third largest expense a business incurs (after payroll and taxes). On average, lease payments typically increase by 3% or more per year, every year. Finding an ideal location to purchase can convert this large, consistently growing expense into an investment that you will someday recapture, hopefully with a nice profit, when you eventually sell the property.
Furthermore, you will be the owner of all tenant improvements you make to the property and never need to worry about a lease not being renewed or having a property sold out from under your business. Don’t underestimate the pride of ownership you will feel as the owner of your business and the place from which your business conducts its business.
This year is clearly a bad year for many commercial property investors; rental rates are down and vacancies are high. These investors, unlike business owners, depend on the rental income their property generates to pay the mortgage. The vast majority of investment property loans have balloon payments every 5, 7 or 10 years. In today’s unstable market, banks are very conservative with property valuations and refinancing investment properties is harder than ever.
Many investors need to sell properties, even ones with positive cash flow, due to a lack of available financing. As a consequence, there are a large number of attractive acquisition opportunities available at historically low prices relative to the cash flow they can generate.
The investor’s challenge is your opportunity. As a business owner you will use your business’ cash flow to cover the mortgage expense. There is a good chance that you are already spending most if not all of the mortgage payment as rent.
The idea is not that your owner occupied real estate is somehow immune to down market cycles. The point is that as a business owner you don’t particularly care because you have no intention of selling in the short term.
Certainly all property owners hope to enjoy increasing property values, but for owner occupied properties it’s not a day to day concern.
Commercial Real Estate has a long history of being an excellent hedge against inflation. Over the long term, commercial properties tend to increase in value at a rate approximately two percent higher than the rate of inflation. Large deficits combined with huge increases in the money supply are going to lead to high inflation at some point. It’s already baked into the economic pie. When that inflation hits, your commercial property will become more valuable. Additionally, you will be paying your mortgage with dollars that are increasingly less valuable.
When you one day decide to retire, owning the property will provide several attractive options. You will be able to sell the business and lease the property to the buyer; sell the business with the property, increasing the business value and making the transaction easier to finance, or sell the business and the property to different buyers.
Property ownership provides many tax benefits and can help shelter business income. Interest deductions, depreciation, amortization, 1031 exchanges and other benefits will help you keep more of what you earn. Speak to your accountant to gain a better understanding on how commercial property ownership can help you keep more of your income and reduce your tax burden.
Outstanding financing options are currently available to help business owners purchase or refinance owner occupied commercial properties. Several underutilized loan programs can provide up to 90% financing for qualified projects. These loans are fully amortizing, so you never need to worry about facing a balloon payment either.
It’s hard to get up the courage to invest in commercial real estate when the market is in turmoil, but I urge you to consider doing just that. The benefits of ownership are compelling and the timing is right.
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