Buying property for business use is a critical decision for any organization aiming to scale, secure its future, and invest wisely. Here are the main points to consider:

  • Secure Future Growth: Owning property can offer stability and ample space for your growing business.
  • Generate Income: You can rent out unused parts of the property.
  • Build Equity: Over time, you build ownership and potentially benefit from property appreciation.

If you would like to learn more about each of these benefits, and how to make an informed decision, read on.

Purchasing commercial property can be a significant milestone and a strategic move. It provides an opportunity to control your business environment, avoid rent fluctuations, and possibly generate additional rental income. It also serves as a long-term investment that can appreciate over time, all while helping to build wealth and retirement income.

I am Matt Morgan. With over 15 years of experience in commercial real estate at IPA, my focus is on Riverside commercial property for sale. My experience spans acquisitions, sales, and consulting, making me a trusted resource for navigating this promising market. Let me guide you through the complexities of the real estate market.

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Understanding Commercial Real Estate

Types of Commercial Real Estate

Commercial real estate (CRE) refers to properties used for business purposes. These properties are designed to generate income for their owners and can range from small office buildings to large industrial complexes. Let’s explore the main types of commercial real estate:

Zoned Land

Zoned land is land approved by local agencies for specific uses, such as industrial or development purposes. This type of land is often bought with the intention of building new commercial properties or expanding existing ones.

Office Buildings

Office buildings are used for business operations and can vary in size and scope. They are often categorized as low-, mid-, or high-rise buildings. Examples include medical offices and suburban office buildings.

Retail Spaces

Retail spaces are properties used for selling goods and services to consumers. They are usually located in accessible areas like regional malls and strip shopping centers. Retail properties can range from small shops to large department stores.

Industrial Properties

Industrial properties host various industrial operations, such as heavy manufacturing, light assembly, and warehousing. They can vary significantly in size and are often located in areas zoned for industrial use.

Multi-Family Residential Homes

Multi-family residential homes are properties with more than one housing unit. Examples include duplexes, triplexes, garden apartments, and assisted living facilities. These properties generate income through rental payments from multiple tenants.

Hospitality Properties

Hospitality properties cater to travelers and include hotels, motels, and short-term rentals like Airbnb. These properties generate income through accommodation fees and additional services offered to guests.

Other Types

Other commercial properties include:

  • Parking structures: Buildings or areas designated for vehicle parking.
  • Movie theaters: Facilities used for showing films to the public.
  • Special-purpose buildings: Properties designed for unique uses, such as data centers or self-storage facilities.

Each type of commercial real estate has its own set of characteristics, risks, and benefits. For example, multi-family residential homes can offer consistent rental income, while industrial properties might require significant customization for specific business needs.

Understanding the different types of commercial real estate can help you make informed decisions when buying property for business use. Whether you’re looking to invest in a retail space, an office building, or zoned land, knowing the options available can guide your investment strategy and help you achieve your business goals.

 

Steps to Buying Property for Business Use

Assessing Your Needs

Before diving into the process of buying property for business use, it’s crucial to assess your needs. Start by identifying your business requirements and the type of property that best suits those needs.

Business Requirements:

  • Space: How much space do you need? Consider both current and future needs.
  • Functionality: What specific features or facilities are essential for your operations?
  • Customization: Do you need the flexibility to modify the space?

Property Type:

  • Office Buildings: Ideal for businesses needing administrative space.
  • Retail Spaces: Perfect for consumer-facing businesses.
  • Industrial Properties: Suitable for manufacturing or warehousing.
  • Zoned Land: For those looking to build custom facilities.

Location:

  • Accessibility: Ensure the property is easily accessible to employees, clients, and suppliers.
  • Zoning Laws: Check local zoning regulations to ensure the property can be used for your intended purpose.
  • Surroundings: Evaluate the neighborhood, including amenities, safety, and future development plans.

Exploring the surroundings and regulations early on can prevent legal difficulties later. Walk around the area, talk to neighbors, and check with local government.

Financing Options

Securing financing is a critical step in buying commercial property. There are several options available, each with its own set of benefits and considerations.

Loans:

  • Permanent Loans: Long-term loans granted after a property has been constructed.
  • FHA Loans: Backed by the Federal Housing Administration, these loans are often easier to qualify for.
  • SBA Loans: Small Business Administration loans offer favorable terms for small businesses.
  • Bridge Loans: Short-term loans used until permanent financing is secured.
  • Hard Money Loans: High-interest loans for short-term needs, typically used by investors.

Investors:

  • Private Investors: Individuals or groups willing to invest in your property for a share of the profits.
  • Real Estate Syndication: Pooling resources from multiple investors to purchase a property.

Consult a mortgage broker to find the best lender for your needs and increase your chances of approval.

Navigating the legal and regulatory landscape is essential when buying property for business use. Here are some key considerations:

Zoning Laws:

  • Ensure the property is zoned for your intended use.
  • Local government websites often have zoning maps and regulations.

Permits:

  • Determine what permits are required for construction or modifications.
  • Common permits include building, electrical, plumbing, and occupancy permits.

LLC Setup:

  • Many business owners choose to purchase property through a Limited Liability Company (LLC) to protect personal assets.
  • Setting up an LLC involves filing articles of organization with the state and creating an operating agreement.

Due Diligence:

  • Conduct thorough due diligence to uncover any potential issues with the property.
  • Hire a real estate attorney to review all documents and ensure compliance with local laws.

By carefully assessing your needs, exploring financing options, and understanding legal and regulatory requirements, you can make informed decisions and avoid common pitfalls in the property buying process.

 

Evaluating Property Investment

When buying property for business use, it’s important to evaluate the investment thoroughly. This involves understanding key metrics and recognizing potential risks and challenges.

Key Metrics for Assessment

Net Operating Income (NOI)

Net Operating Income (NOI) is a critical metric. It’s calculated by subtracting operating expenses from the property’s gross operating income. A positive NOI indicates the property is generating income after covering its operating costs.

Cash Flow

Cash Flow measures the amount of cash generated by the property after all expenses, including mortgage payments. Positive cash flow means the property is earning more than it costs to maintain.

Appreciation

Appreciation refers to the increase in property value over time. Investing in areas with strong economic growth and high demand can improve appreciation potential. David Cameron from City National Bank notes that properties in high-density markets often appreciate significantly, adding to long-term wealth.

Diversification

Diversification in real estate can help spread risk. Investing in different types of properties (e.g., office buildings, retail spaces) or in various locations can protect against market volatility.

Inflation Hedge

Real estate often serves as an inflation hedge. As inflation rises, property values and rents typically increase, preserving the purchasing power of your investment.

Tax Benefits

There are several tax benefits to owning commercial property:

  • Deductions: Expenses like mortgage interest, property taxes, and maintenance can be deducted.
  • Depreciation: The property can be depreciated over time, reducing taxable income.
  • 1031 Exchange: Allows deferral of capital gains taxes when exchanging one investment property for another.

Risks and Challenges

Market Factors

Market factors such as local, national, and international economic conditions can impact property values and rental income. For example, during the Great Recession, commercial real estate values fluctuated significantly.

Tenant Issues

Finding and retaining reliable tenants is crucial. Tenant issues can lead to vacancies and lost income. The U.S. industrial real estate market, with its low 7% vacancy rate, illustrates the importance of strong tenant demand.

Property Management

Effective property management is essential to maintain and improve property value. This includes regular maintenance, updates, and compliance with regulations. A property manager can handle these tasks, but their services come at a cost.

Financing

Financing can be complex. Interest rates, debt levels, and refinancing options impact your investment’s profitability. Bridge loans and hard money loans, while useful, come with higher interest rates and shorter terms.

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By understanding these metrics and recognizing potential risks, you can make informed decisions when investing in commercial property.

Benefits of Buying Property for Business Use

Income Generation

One of the main benefits of buying property for business use is the potential for income generation. When you own your property, you can rent out unused spaces to other businesses. This can help subsidize your mortgage payments or even provide additional cash flow.

For instance, many business owners form LLCs to purchase their properties. This structure allows them to lease parts of their buildings to tenants. According to a report by NAIOP, the demand for industrial space in the U.S. remains strong, with a historically low 7% vacancy rate. This means there’s a good chance you can find tenants and generate rental income.

Asset Appreciation

Real estate generally appreciates over time, especially in high-demand areas. David Cameron from City National Bank highlights that properties in high-density markets often appreciate significantly. This means that your property could be worth much more when you’re ready to sell or retire.

Owning property in a growing area can lead to substantial gains. For example, during the Great Recession and recovery period (2008-2012), commercial real estate values performed well.

Tax Advantages

Owning commercial property comes with several tax advantages:

  • Deductions: You can deduct expenses like mortgage interest, property taxes, and maintenance costs from your taxable income.
  • Depreciation: The IRS allows you to depreciate the value of the building over time, which can further reduce your taxable income.
  • 1031 Exchange: This provision lets you defer capital gains taxes when you sell one investment property and purchase another. This can be a powerful tool for growing your real estate portfolio without paying taxes on each transaction.

Buying property for business use offers significant benefits in terms of income generation, asset appreciation, and tax advantages. These benefits can make a substantial difference in your business’s financial health and long-term wealth-building strategy.

 

Frequently Asked Questions about Buying Property for Business Use

What is buying for business use?

Buying property for business use means purchasing real estate to conduct business operations, generate income, or both. This can include office buildings, retail spaces, industrial properties, and more. Businesses often buy property to:

  • Establish a permanent location: Owning property provides stability and control over your business environment.
  • Generate rental income: Leasing out unused spaces can create additional revenue streams.
  • Customize the facility: Owning allows you to tailor the space to fit your specific business needs without landlord restrictions.

How to know if a commercial property is a good investment?

Determining if a commercial property is a good investment involves evaluating several key metrics:

  • Net Operating Income (NOI): This is your property’s income after operating expenses but before taxes and financing costs. A positive NOI indicates potential profitability.
  • Cash Flow: The cash remaining after all expenses, including mortgage payments. Positive cash flow means the property generates more income than it costs to maintain.
  • Appreciation Potential: Consider the property’s location and market trends. High-demand areas often see significant appreciation over time.
  • Tenant Stability: A property with long-term, reliable tenants is less risky and provides steady income.
  • Market Conditions: Assess local and national economic factors that could impact property values and rental demand.

The demand for industrial space in the U.S. remains strong, with a historically low 7% vacancy rate, according to NAIOP. This suggests that industrial properties are likely to be good investments due to steady tenant demand and income potential.

Buying property for business use involves careful evaluation and planning. By understanding key metrics and consulting with professionals, you can make informed investment decisions that benefit your business.

Why Choose IPA Commercial Real Estate?

Buying property for business use is a significant step that can provide stability, income, and growth for your business. It involves careful planning, understanding your needs, evaluating financing options, and considering legal and regulatory aspects. While it may seem daunting, the rewards can be substantial, including asset appreciation, rental income, and tax advantages.

At IPA Commercial Real Estate, we understand the complexities of commercial real estate investment. Our team of experts is here to guide you through every step of the process, from finding the right property to closing the deal. With over 30 years of experience in the Inland Empire market, we have the knowledge and expertise to help you make informed decisions that align with your business goals.

Ready to take the next step?

Contact us today to learn more about how we can assist you in buying property for business use. Our dedicated professionals are here to provide personalized support and ensure a smooth and successful investment journey.

Get in Touch:

Let’s connect and explore the opportunities that commercial real estate investment can bring to your business.