Need advice on buying first commercial property - owner occupied
Spring, TX · Member since 2016 · 23 posts · 2 votes
Need advice on buying first commercial property - owner occupied
5 Replies
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes5y
Typically if you occupy 51% of the building space the business is in can get in with about 10% down on SBA loan. You have to qualify for the loan though not be losing money and bleeding cash. If you are no strong enough for that yet could likely lease with ROFR and option to buy before anyone else. You need to compare what the RENTS are per ft for that box building size and location in your area versus what it would cost to buy the building with an SBA loan if you qualify and see which makes more sense.
The good part about owning a building is you usually build up equity so it business eventually goes online or you sell it you still have an asset for land and building if business moves. Also if business no longer becomes relevant you have value in the land and building as an asset.
Think about karate school open for 20 years but shuts down and owner retires and now owns the building or pawn shop that business has now gone online but can redevelop the site with new tenant because dirt and location is good. You have to think also about your enterprise value of the business over time and the average multiple it will sell at.
Example if my business does 1 million net profit at 3 multiple worth maybe 3 million purchase but if say 3 million net profit someone with business growing like crazy might pay 7 multiple for it or 21 million. So there is time into real estate investments and time into growing your business value.
Hope it helps.
- 5yRob ElderPro MemberCape May Court House, NJ · Member since 2016 · 11 posts · 2 votes
- Charles I hope this helps, I copied the formatting and it numbered it funny
- Is it worth the hassle of setting up a second company to purchase the property, or should she just buy it with her original business?
- Yes, There are multiple reasons for this. Keeping the property separate from the business through LLC's or the like keeps the business insulated from the property and the property from the business. It does come with some costs in taxes and accounting but well worth it IMO.
- One seller is offering a lease-option. Are those worth it? Anything to watch out for?
- Leases with options to buy can be very advantageous to both parties if set up correctly. BIG emphasis on correctly. In todays interest rate environment I would say a straight purchase through an SBA 504 or 7a program would be better. The 504 program offers low fixed rate long term interest rates on up to 40%,variable on 50% and only a 10% payment required. The 10% can be met with some expenses in the buying process. The SBA is encouraging investment right now and if your business is growing they can help.
- Can we get an SBA loan for this? I've heard it's an option but also heard they only pick certain people and don't want to go through the hassle if we won't qualify.
- When I bought my owner/occupied property through an SBA backed loan in 2015 I heard the same things, People aren't loaning money, that only goes to Joe Blow, Etc. When we sat down with the gentleman who helped us, he laughed at us when we asked if he thought he could help. I was a little taken back until I realized he was laughing because we had our **** together and he didn't normally see people like us. What the reality was and still is, is that they will help you out along the whole process but its ultimately up to the bank to qualify you and the SBA simply guarantees it. I went through one of the local Small Business Development center and they held my hand through the entire process, paid for some accounting work, help me shop loans and in general were there for what I needed. The down side is turning over your financial info every year if you don't feel comfortable.
- Growing a business is expensive enough as it is, and coming up with a down payment on top of that is going to be tricky. What do you suggest if we don't quite have enough? Are there other places we could look to borrow? Prioritizing this ahead of time is the only way to make it happen and if you look hard enough you will find a way. There are many books, blog posts and what not out there to help jog your mind. When you make this a priority you then have the opportunity to start paying yourself rent which is a much more tax efficient way to earn money from the business than straight income.
- 5yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
- 1. Is it worth the hassle of setting up a second company to purchase the property, or should she just buy it with her original business? Yes, its the standard SPE requirement for most lenders (other than Owner occupied/SBA)
- 2. One seller is offering a lease-option. Are those worth it? Anything to watch out for? Yes, can be good if you think the value will go up during your lease. Must have an attorney review, these are complex.
- 3. Can we get an SBA loan for this? I've heard it's an option but also heard they only pick certain people and don't want to go through the hassle if we won't qualify. Yes, as mentioned, 51% and decent business history cash flow on tax returns.
- 4. Growing a business is expensive enough as it is, and coming up with a downpayment on top of that is going to be tricky. What do you suggest if we don't quite have enough? Are there other places we could look to borrow? Save money. you said her business is growing, is it not throwing off tons of cash? Save up for 3-6 months???
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