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The Secrets Entrepreneurs Must Know Before Investing In Real Estate

6 Mins read

Real estate seems like the last thing to invest in as a business owner. There are numerous assets which would be as, if not more important. A fleet of company cars, for example, encourage the best employees to work for the firm while advertising the brand. A new machine can increase manufacturing output and productivity overnight. And, ergonomic tables and chairs can make sure your workers are comfy and ready to work every time they enter the office.

investing in real estate

Shutterstock Licensed Photo – By Andrey_Popov

A building is an over-the-top purchase, especially when you can rent one. It’s as cheap and suits the budget, which means there’s less chance of losing money and going bust. So, what is the point in investing in a commercial property?

The answer is it’s a wise way to spend the company’s money. Leasing it to another firm is a straightforward way to ensure there’s a quick return on your investment. Selling it can do the same thing as certain places in the world have great growth potential. Last but not least, it’s better than putting it in a savings account and exploiting the non-existent interest rates.

So, with that in mind, here are the secrets to understand before diving into the industry head first. After all, not every investment is the same, particularly if you’re a novice.

Civilian Rules Apply

It’s worth noting there is a huge difference between buying a residential and commercial property. The features which make a detached property in the New York suburbs appealing are the same things you want to see in an office space. Offices need to be big with plenty of light and lots of room for growth. Houses must have gardens and conservatories and a place to park the car. In many ways, they’re opposites.

But, in some ways, they’re the same. Yep, it’s a paradox and one which isn’t easy to understand at first. However, once you realize which features correlate, then it becomes straightforward. The area where there is a pattern is the location. For one thing, transport links are as essential for business owners as families. Employees, clients and customers need to be able to reach the building without multiple changeovers. Then, there is the curb appeal. Neighbors want to show off, and companies have to if they’re going to raise awareness of their brand.

Also, the location counts for foot traffic. There is no point in buying a property in the middle of nowhere as nobody will see the investment.

Zoning Is Imperative

In simple terms, zoning is how the local authority decides who and what can be built on the land. Typically, it’s used by governments to stop massive conglomerates buying up plots of land and saturating the market. The last thing a homeowner wants is a new nuclear power plant across the road. For entrepreneurs, the importance of zoning is two-fold.

To begin with, it’s essential that you buy in an area where there aren’t limiting restrictions. Imagine paying hundreds of thousands of dollars to expand the firm, only to find it’s a listed building and it’s banned. Finding out after the fact is a waste of money, which is why you need to research real estate listings before bidding. A quality realtor with experience in the local area should be able to help. The second point is positive equity. On the flip side, it’s savvy to purchase an office in an area where planning permission has been granted.

Not only is it good for the business regarding expansion, but it’s great in terms of reputation. When an area takes off and secures a solid standing, then big firms turn up in town. Any company with a piece of real estate next to Microsoft or Facebook is bound to piggyback off their global appeal.

Tax Is Worth Exploring

There is a moral obligation for businesses to do their duty. Regular US citizens have to pay tax and so should the brands in which they invest their money. Some of the actions of the likes of Google and Apple are appalling when you look into the fine details. How is the new Apple HQ only worth £200bn? It has a lake, for God sake! While you don’t want to rip off the country, it’s still a numbers game and there are loopholes.

A dilemma it might be, but it’s worth considering the potential tax breaks regarding commercial property. For example, investing in foreign real estate can save the company a lot of money if it’s in low-tax nations such as Switzerland. Luxembourg has a similar strategy, which is why Amazon’s European branch has its headquarters there. You would still pay tax in the US but your contributions in global terms would be small.

Indeed, the new regulations might mean there is no need to leave the country. The “Territorial” system is a mainstay of the Trump regime’s policy. In short, it’s a way to get multinational businesses to pay tax only on money earned in American territories. Although the cuts aren’t immediate, it does give you the flexibility to prove profits occurred outside of the States.

Tenants Are Friends/Enemies

Nowadays, it’s best to keep hold of your real estate portfolio for future gains. Plenty of cities and towns in America are bouncing back from the housing crash in 2008 and profits are soaring. But, this is an investment so you don’t want to use it for practical purposes. The current lease doesn’t expire for a while and your content at the moment. No worries; you need a tenant.

Getting people to pay the rates while you’re not using the office is the best way to make money. At the least, you’ll break even because they’ll cover the mortgage. Be warned: they’re not easy to deal with. Tenants are always looking for flaws and reporting them back to their landlord and are constantly on the phone. Even when they pay on time, it can get frustrating.

A contingency plan is important if you’re going to survive the process. For example, lots of commercial property owners hire building management services. Rather than deal with it personally, they outsource it to a third-party and interact with the company. From a landlord’s point of view, it’s less hassle and doesn’t waste as much time. This makes it worth the extra money, especially if they can get the tenant to pay on time every month.

You Don’t Have To Buy

And this doesn’t mean you have to rent or lease, either. There are ways to buy a commercial property without signing on the dotted line. All you have to do is think outside of the box. For instance, have you heard of an exchange-traded fund? An ETF is a mix of stocks and bonds in one fund. In simple terms, it’s like having a stake in a property without dealing with a lender. Assets include everything from offices to hotels, so there’s plenty of diversification.

Or, there are REITs. These are similar to ETFs in the sense that they are good for avoiding risk. Usually, the data from different areas of the market doesn’t affect REITs. They’re not bulletproof but they do come with a jacket. Plus, it’s another way to own a property without being a landlord. The thing to watch out for is the no-trade options. Like all trends, they have lots of popularity at the moment.

However, the SEC has come out recently to warn investors away. Apparently, they’re expensive, don’t have much cash flow, and don’t have any value in some cases. To cut out the middleman, you can pump money into a real estate company. When their portfolio bumps, then you’ll benefit from their success. Think of it as backseat investing.

It’s Not A One-Man Thing

It’s tempting to make this about the male ego, but the expression applies to bosses of all shapes and sizes. Women, if they are leaders, are as culpable for taking control. It’s part of the job description when something you own is on the line. Micromanaging means it’s not down to the skill of others to keep the firm afloat.

The clear commitment issues aside, it’s very dangerous to try and invest alone. The first thing to note is your lack of skill and experience. Without understanding the market and how to strike a good deal, you’ll get off to a terrible start. Then, there is the financial aspect. Again, it’s hard to figure out how to save money on tax or expand etc. without an accountant. Also, there is the overall hassle of having to deal with the extra hassle. Managers have hundreds of things to do in one day so the last thing you should worry about is an investment.

Partners are vital as they will fill in the inevitable gaps in your knowledge. Yes, you can go it alone yet it’s much riskier than asking for help. It’s not easy to admit as a boss, but you can’t do everything alone.

Are you thinking about taking on a real estate project? What have you learned which will help you through the process?

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About author
Ryan Kh is a big data and analytic expert, marketing digital products on Amazon's Envato. He is not just passionate about latest buzz and tech stuff but in fact he's totally into it. Follow Ryan’s daily posts on Catalyst For Business.
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