realestate_matters

Business Property - A Look At The Advantages and Disadvantages of Buying

Nearly every type of business needs a premise from which to operate - In the case of a small business it may be possible to work from home however as most things do eventually grow and expand, it may be necessary to obtain larger working facilities.

The majority of businesses will require their own premises and are generally faced with the option of either renting or buying. The obvious choice for many would be to buy, finance allowing however there are advantages and disadvantages to both sides.

Advantages Of Buying
Retention of ownership - most businesses will need to take out a loan in order to purchase property. In the case of taking out a mortgage, the business is able to raise the capital without resorting to selling a share in the company, either to an interested party or by way of issuing shares. In this case the original owners will have retention of both ownership and control. The mortgage lender will have the right to charge interest on the loan amount outstanding however it will have no interest to a share in the business or its profits. The lender has an interest solely in the property and is only permitted to call in the loan in the event of borrower default.

Taxation - Businesses are permitted to make mortgage interest payments with pre-tax money that is deductible for tax purposes as expenses.

Cost and cash flow management - A commercial mortgage allows a business access to finance that would not usually be available. They can offer a degree of flexibility in designing a repayment scheme to suit the needs of the business, which may include fixing the repayments for a set period of time. Mortgage repayments tend to work out lower than rental payments and the borrower in this case will know what the payments will be in advance - this fixed payment can often aid the business with cash flow and managing costs. Businesses that rent a premise can be exposed to market conditions which could result in payment fluctuations on review.

Security of tenure - Businesses and individuals that rent have very few guarantees beyond the end of the current agreement.

Asset appreciation - This of course is by no means guaranteed however property has long been viewed by many as a very sound investment. The business or individual will have an asset which can potentially grow in value, just like residential property - this could subsequently increase the value of the business.

Financial flexibility - Taking out a loan by way of a mortgage to buy a business premises can free up money held in the business for other purposes. Borrowing money outside of a mortgage could prove to be more costly. It may also be possible to remortgage in order to raise finance in the future by using the available equity.

Retirement - Many people decide to hold property in a pension plan which can offer a tax-efficient way of buying the premises and boosting pension benefits.

Disadvantages Of Buying
Financial difficulty - Like any other mortgage, the mortgage lender will hold a legal charge over the property. Nearly all businesses meet financial difficulties at some stage which could potentially result in mortgage payments being missed. In the event of default the lender may take steps to repossess the property - if this happens then it would leave the business with nowhere to operate from.

Relocation - In the event a business needs to relocate, it is relatively easy to terminate a rental agreement. In the case of an owner occupier, the process is of course far more complex.

Flexibility - A business that rents has a far greater amount of flexibility that a business that is tied to a mortgage. Buying would only make sense if the business is confident over its future which encompasses two main factors - relocation & business expansion.

Drain on Capital - When it comes to getting a deposit, this can mean a huge drain on the business capital as this is usually taken from the profits or reserves.

Maintenance and upkeep - The owner of a property has management responsibilities that a tenant would not usually have - maintenance and upkeep of a property is a constant process and can prove to be very expensive.

James Cooper
19 June 2007

James Copper writes on all areas of finance. He works for Any Loans who specialise in commercial mortgages and business loans.

Articles on Real Estate Matters:

Effective Real Estate Strategies For Slow Markets

Speeding Commercial Real Estate Sales in Slow Markets

Effectively building commercial real estate wealth requires the ability to spot a great bargain and the ability to sell that property well, no matter what the state of the market. The real estate market is notoriously cyclical in nature and somewhat difficult to predict. The market for local and national real estate can turn quickly and it is important for every investor in real estate, from the largest player to the smallest, to have strategies in place for selling properties in down markets.

In a hot real estate market, of course, little marketing is required. We have all heard the stories of bidding wars breaking out in the residential market at open houses in California and elsewhere. In the commercial world, it’s not unusual to have 30, 40, or more institutional and private investors bidding on a piece of prime commercial real estate in a strong urban market. In these kinds of markets, all a Seller needed to do was hang up a metaphorical “For Sale” sign and wait for the hordes of buyers to appear.

Of course, these markets do not last forever. Lately, we’re seeing some pressure on cap rates as short term interest rates have climbed in response to the Fed’s tightening. Those formerly “hot” markets have become “luke-warm” markets and are cooling further. As prices for residential and commercial real estate spiraled ever higher, more and more buyers found themselves priced out of the market. Even the creative financing schemes created by mortgage lenders often failed to close the gap. In hindsight, the downturn seemed inevitable, but many failed to see it or prepare for the inevitable slowdown to follow.

Fortunately it is not too late for sellers of residential and commercial real estate to get the most out of their property, even in a slowing market. Listed below are some strategies for turning that “For Sale” sign into a “Sold” sign.

• Price the property properly. The market will tell you what you property is worth, regardless of what you think. Price the property realistically, especially in a down market. It is important to understand that the value of a particular piece of real estate is derived not only from the underlying value of the property itself, but by market conditions.

• Offer incentives to attract buyers. Offering unique incentives can go a long way to boost the attractiveness of a particular piece of property and help you stand out from the crowd. Some sellers are including perks like free plasma TV’s, vacations, sporting event tickets, and other unique incentives. What’s important to note about these offerings is that while they represent a very small percentage of the value of the property being sold, they create traffic, interest, and distinguish you from the competition.

• Don’t overlook the value of curb appeal. How your property looks from the outside is an essential part of marketing, called “packaging.” Enhancing your property’s curb appeal can often be achieved with little expense. Consider painting, re-landscaping, signage, and minor parking lot repairs. Between two similarly priced properties, the better looking one will probably get sold faster.

There is no doubt that selling a property in a down market can be a challenge, but the good news is that these strategies can help to preserve those hard earned profits.

Craig S. Higdon
04 May 2007

WANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: ‘“The Investment Property Insider” is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine and blog, http://www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: “The 7 Biggest Loan Mistakes Real Estate Investors make and How to avoid them.” ‘

Buying A Condo As An Investment

A lot of people ask us as part of their search for a condo, which ones are better investments. Personally, if I knew the answer to that 100%, I would be writing this from my own private island. Alas, that is not the case and I write in my home office, looking out at the snow.

There is no hard and fast rule when it comes to investment condos. A lot of it depends on what exactly you are looking to get out of it. Some people think of investment condos as rentals, while others are thinking of sales value down the road.

If you are looking to buy a condo to rent out, then there are a few factors you need to consider.

First, don't just buy the smallest and/or cheapest unit you can find. Not too many people are going to want to live in it - would you? Instead, think of who your target market is going to be. If you want singles, then one bedroom condos would be fine. Once you get to couples (with the possibility of children), then you are going to want to think more in terms of larger units with two bedrooms.

Speaking of which, there has been a recent hue and cry over the lack of condos that are suitable for families. Sure, there are a few tired old buildings with three bedroom units, but they are few and far between. Where are the new units? What are the options for the families that don't want a house? Or those than can't afford a house? Before I get to really ranting, I just wanted to point out that condos need to be equal opportunity. They are not just for singles or couples or empty-nesters. Some people want to raise a family in the sky. Time to do something about it. Anyway, on with the article...

Location is also going to have a bearing on your target market, or on the available pool of renters who will make up your market. If you want primarily university students, then look to buy near U of T, York, Ryerson, etc. Don't forget the smaller schools and colleges, such as George Brown or Sheridan. There are a lot of students in Toronto, so there are a lot of options for you to appeal to them.

The flip side of course, is that if you don't want student renters, don't buy near where they would want to live!

If you want doctors and nurses and interns and the like, then you are going to want to buy along Hospital Row, or not too far from it. Yes, there are more isolated facilties around the city, but stay close to where the biggest renter pool is likely to be.

Many people often ask about new condos versus resale as rental properties. This is a hard one, but my gut feel is that new buildings are not the best bet. Maybe if you are going for a 1,200 square foot penthouse with a view to die for, but a simple one bedroom just puts you in the pack with everyone else. If a 300-unit building has 30 people buy to rent out, you are going to be facing some stiff competition to get a renter into your unit. You may be best to simply avoid that sort of competition and look for resales or smaller new developments.

Speaking of competition, this might be a good time to delve into a discussion of rents and their recent decline. With all the condo action in Toronto the past few years, many units have been built and many have been bought to rent out. As with any market, supply and demand dictate pricing. When there are more units than renters, there is more and more competition to get those lease dollars. Thus, rents go down.

Even with a decline in rental amounts, if you are buying as an investment, you need to look at the larger picture. Don't expect to pay your mortage and condo fees - and make a profit. Those days are gone. But add up all the monthly expenses and if you get a rental amount that is not so much less than you are spending, then you have to think about it more in terms of your mortgage only costing you $100 a month. Even if it is $300 a month, that is significantly less than if you were paying everything yourself. You don't get much for nothing these days, so be happy that someone is helping subsidize your mortage.

Now, there is another group of people who are thinking more about sales in the future. Some may be buying a condo off plans with the thought of flipping it once the building is done. I don't want to repeat myself, but basically re-read what I said above about buying in a new development to rent. Being one of the herd is not always a good thing.

It used to be that buying new and selling it after living in it for a few years was guaranteed profits. Not so much anymore. Land costs and building costs are up, plus builders know they can get more for their product. Thus you have to think more strategically these days.

There are three things I generally advise when people ask me what to buy that will increase over the years.
First is to buy large. Buy as big a condo as you can afford. This is for two main reasons. The first is as above, so as not to be one of 100 one bedroom units for sale in a building. The second is that a large segment of future condo buyers are going to be empty-nesters and downsizers. Many older couples will be leaving their larger homes and they are not going to want to live in a 650-square-foot one-bedroom condo.

Second is to look for up-and-coming areas. Of course, that leads to the question of what areas are up and coming. Anywhere the prices are not through the roof. Areas where there are very few new developments. Areas you see or hear or read about. Take the Queen East corridor - that is going to be the next King West, mark my words. Have you heard the terms Leslieville or Studio District or Corktown bandied about? There's a reason for that...

Third and last is to try to find something as unique as possible. Again, when it comes time to sell, you need something to help you stand out from the crowd. Many people don't want the norm, they want something interesting. Think about a loft, especially a conversion. Something with a unique layout or different location. Anything that is not the same as 99% of your competition.

I know this might be a lot to digest, but trust me, read it through and think about it. There are a lot of options out there and you need to narrow them down to only the best ones for you. Of course, every situation is different, but that is why the end result will have a different shortlist for everyone.

And that is what helps to keep the market unique and allows people to make money in real estate.

Laurin & Natalie Jeffrey
17 May 2007

Laurin & Natalie Jeffrey || Sales Representatives Right At Home Realty Inc., Brokerage laurin@jeffreyteam.com || http://www.jeffreyteam.com 416-388-1960 || 416-318-7917