The True Cost of Commercial Real Estate Ownership by Rick Lawton

Buying the building in which you function your manufacturing, submission, or service business can offer huge benefits. You resolve your "rent" for a long period of time, you monetize on the admiration of the building, certain tax benefits may apply, and if the possession is organized properly, you pay yourself each month rather than a landlord.

But before you rush out to buy an commercial building, I believe it is important to determine the true cost of ownership.

Additionally, leasing a building might make more sense than buying a building if your company's growth plans will exceed the building's potential in the next three to five years, if your company is taking operating capital to fuel that growth, if the business has been unprofitable for two of the past three years, if you are planning to sell your business in the expected future, or if the possession of the company has multiple members or is openly traded.

Rick Lawton has always been very detail-oriented and enjoyed what he does. He is a professional with vast experience in the military and legal fields. Currently, he is engaged with LL Reality in social media campaigns. LL Reality is complete service professional property management business. Once you have determined that buying is the way to go, what are the TRUE costs of ownership?

Financing costs.

Until your wealthy aunt Mabel left you a bundle, chances are you will finance the purchase of your commercial real estate. If you're curious about the various ways to finance your purchase, you can read about it here. Depending upon the amount of your down purchase, you will be funding a chunk of your purchase price. This chunk will have an interest rate and be paid back over a number of years. A part of your payment, monthly, will be interest and a part principal. The total payment is known as debt service. With today's super low interest rates, lock in for as long as you can. This will fix your servicing costs for years to come. 

Property taxes and insurance.

In addition to the debts service defined above, you must add in the monthly costs of property taxes and insurance. In California, property taxes are approximately 1% of the assessed value. Property taxes are due twice a year in November and February. Most owners budget for this biannual expenditure by setting apart the monthly sum. Insurance plan on the property must also be paid. Generally, you pay for property insurance annually. But, similar to property taxes, most owners budget for this annual expense monthly.

Maintenance costs.

Systems within the developing must be managed and replaced once they eclipse their useful life. Such systems include air conditioning , heating, warehouse sprinklers, power panels, plumbing, roof, etc. Typically, monthly, quarterly, or annual maintenance programs are employed but it is smart to build a source each month in the event one of the systems fails and must be changed. Take a look at the situation of these systems when you buy the building. I suggest making a report that budgets major expenditures over the first five years of ownership.

Return on your investment. 

The money you spend to buy the building (down payment) should be added to other deal costs such as lender points, appraisals, environmental reports, legal fees, and source accounts. All of these charges are your investment into the developing. It is affordable to expect a return on this investment, however meager. Keep in mind, if you are buying a building to house your business, you and your business have other uses for the capital - some uses will earn you and the business great profits.

Miscellaneous costs.

Mowing the grass, cutting the trees, changing broken sprinklers, cleaning the floors, discarding of the trash, sweeping the parking lot, watering the landscape, etc. all are costs that you will incur - even if you have an employee accomplish the tasks. Account for the expense in your true cost.

The acid test.

Once all of the costs are computed and totaled, compare your true cost of ownership to the lease rates for comparable buildings. If the cost of ownership exceeds the market lease rates by 20%, rethink your purchase. You might be better off renting.