When the owner of an office building makes the decision to sell his asset, current tenants are often the first individuals he approaches as potential buyers.
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From a tenant's perspective, the idea of buying your office building can be tempting, but is it really a good idea?
There are a lot of upsides to purchasing your office building. For starters, unexpected rent increases become a non-issue. Investment income, asset appreciation, and increased autonomy aren't bad benefits, either. Yet there are a lot of other considerations that need to be addressed before you take the plunge into commercial property ownership.
Initial Cash Outlay
The purchase of real estate requires a significant outlay of upfront cash. Although the bulk of the funding can be financed, lenders require a downpayment in the neighborhood of 10-20% of the purchase price. If you don't have that much cash on hand, you'll have to either divert funds from other areas of the business or recruit investors to raise the amount of cash you need. If your business isn't in a position to do that, don't even think about trying to buy your building.
The downpayment isn't the only cost associated with owning an office building. If the building is in bad shape, you'll need to factor the cost of repairs into your calculations. Although tenants will be responsible for the upkeep of their own space, your ongoing expenses will also include the cost of maintaining common areas, landscaping, and parking lots, not to mention taxes and insurance.
Owning an office building isn't always a bed of roses. Sure it has its advantages, but it can be a lot of hard work, too, especially when it comes to managing the demands of finicky tenants. Even easy going tenants require a certain amount of administrative attention so you can be guaranteed that your administrative workload will increase once you assume ownership. If you don't have the administrative capacity to absorb the increased workload, you'll need to hire more help – an expense that can quickly wreak havoc on your efforts to make the purchase financially feasible.
Vacancies are the most frustrating aspect of commercial property ownership. Unlike residential rental properties, commercial properties don't turnover quickly. It's not uncommon for commercial spaces to lie dormant for many months before a qualified new tenant can be located. To do it right, your budget needs to account for a certain amount of vacancy as the cost of doing business. Contact a local real estate agent to get an estimate about the amount of vacancies that are reasonable for your area.
The Right Motive
Finally, it's important to make sure you are purchasing the office building for the right motive. If your motive for purchasing your office building is simply to reduce your monthly expenses or turn a quick buck, you may need to reconsider your decision. However, if your motive is to invest in an asset with the potential for appreciation and a somewhat steady income stream, you're probably on the right track.