Investing in commercial real estate can be an excellent option for a small business to build equity and earn passive income. If you’re considering this option, it’s a good idea to learn what lenders typically look for when making these loans. The first and probably the most important thing is that you have been in business for at least five years and have posted a profit for at least the past two years.
Another consideration is whether your business is privately or publicly held. If it’s the latter, showing real estate depreciation could be a disincentive to potential investors, something you obviously want to avoid. Additionally, real estate investing isn’t the best choice for large businesses with many owners. It’s a better option for limited liability corporations because the ownership structure of the property shows depreciation on the balance sheet you keep for personal purposes. This can provide you with several tax benefits.
Finding a Lender for Your Commercial Real Estate Venture
Once you have determined that purchasing real estate will have a positive impact on your small business, the next step is to find a lender. The Small Business Administration (SBA) can be an attractive choice for a lender because it offers lower down payments and interest rates.
You also need to consider the potential negative aspects of an SBA loan. Some of these include pre-payment penalties, the need to pledge collateral and make a personal guarantee, paying an origination fee, and strict requirements for business profitability, number of years in business, and cash flow. You can expect to fill out a lot of paperwork with SBA loans.
Financing by Seller
If a seller owns a commercial property free and clear, he or she may be able to offer you a much more attractive interest rate than you would find at a bank. These loans are also more flexile since you work with an individual and not a financial institution.
These represent just two of your many options for real estate financing. Please contact Capital Connex to learn more about each one.