At Swallowtail, we’d always had the idea that we would purchase commercial real estate for our offices. We thought we wanted either a little cottage on either side of Main Street, or one of the loft offices over looking Hutchinson Square. We thought these kind of offices would fit our business image, would be easy for our clients to get to, and would increase our visibility in the community. We’d also imagined buying our own little building and renovating it ourselves so we would have more control over the design process.
Full disclaimer: as architects, we understand buildings, how they are built, and what are the building codes that govern their construction. But we had never bought commercial real estate before and there was a lot to learn. And we needed to learn it fast!
When is the Right Time to Buy Commercial Real Estate?
We had projected it would be several years off in the future. However, when the property prices and the interest rates seemed to be at their lowest, we started looking on the internet to see what was available and what were the listing prices. We were pleasantly surprised! Maybe this was the time to look and see what was actually out there. We had very specific parameters, and we were willing to wait until one of those kinds of properties came on the market at the right price.
Finding a Realtor
If you go online, you know there are a lot of realtors! You want to find an good agent, someone who has tons of experience and can use that knowledge to advise you the merits of each property, and also on the other options. If you don’t know one, get a referral and see if they are a good fit for you. We asked our one of our favorite residential realtors to refer us to a good commercial realtor.
We spent time with our agent so they would know a good ‘Swallowtail’ property when they saw it and would really understand what we were looking for. The value of a good agent is:
- They may suggest other properties that may be a good fit for you, even if they are slightly outside your parameters.
- They are a good resource to advise on the relative value of one property compared to another. If you plan on improving the property, your realtor can be the first step in helping you compare this property to others that are similar.
- They will present your offer in the best light, and negotiate with the seller/seller’s agent to put a deal together
- They can advise you on the next step in the process.
Could We Buy?
The first thing we found out: you need at 20% to put down on a commercial or investment property. That can add up fast! You will also need some funds to hire professionals to review any property you wish to purchase during your due diligence period. And don’t forget the closing costs. This will include bank fees, any appraisals the bank requires and your lawyers fees.
Should We Buy?
Before we got too far in, we needed to know if this was going to be a good deal for us. We talked to several people to help us figure out if buying a commercial property would be a good decision for us.
First we sat down with our Book Keeper, looked at our books and evaluated our finances. We analyzed the reports and evaluated if Swallowtail could bear an increase in our monthly rent. Our current rent is ridiculously low, but it was a great place for us to start as a new company. We knew any change would be a substantial increase. Were we ready? We decided we could increase our monthly expenses, and determined the maximum amount we were willing to pay.
We talked to our Tax Adviser to find out the tax implications of talking money out of our personal investments, and on how to reduce the tax in the future. Based on that meeting we decided to set up a new company that would be the new owner of the property and would manage the property.
We also talked to our Investor and discussed which investments we could use without much penalty. That helped us define the maximum amount we wanted to use in the purchase of a new property. We also had our investor map out the implications of making the purchase, and compared that to the current projections without the purchase. We used very conservative parameters so the comparison would be as realistic as we could make it, or even show a worst case scenario. For us, there was a huge long term benefit when we added the property.
Then we talked to several Financial Institutions to see if we could get a loan. As a new company, Swallowtail did not have enough track record to meet the requirements of many financial institutions, especially the big national banks. So we had to find a financial institution that had flexibility and the local autonomy to make local decisions. We narrowed it down to three possibilities. We were surprised to find that each of the three approached the financing differently, and they each came up with different way to put a package together. In the end we chose the financial institutions that had the best package for us, and who we wanted to develop a long term relationship with.