What’s the real cost of a real estate downpayment? – Press Telegram
As you’ve read here several times, buying commercial property is a great way to build generational wealth. It’s like a jelly of the month club. By that I mean the gift that always passes on!
Many of those reading this column have started businesses based on commercial real estate that they also own. The occupying company therefore generates income through its business operations and pays rent for the use of the building. The company value increases over time and the address increases in value. A double blow!
Southern California has countless business stories of a generation taking a risk, starting a business, buying a location, and benefiting subsequent family members. I have the privilege of advising these family-run production and logistics companies.
A conversation recently struck me as particularly worthy of a column. How much should be specifically earmarked for a down payment if you intend to buy? The simple answer is: 10% of the purchase price with leverage via the Small Business Administration and 20-30% with conventional financing. Boom. Complete. We meet next week.
But wait, there’s more … much more to the history of lending. So stay tuned for a minute.
In addition to the 10-30%, it is suggested to budget for:
Appreciation: Regardless of your choice of lender – SBA, bank, insurance company, or hard money – an assessment will be carried out. The bank’s underwriting includes confirmation of the market price paid. Plan on spending between $ 2,500-5,000 for this review.
Environment: Lurking beneath the surface of your purchase could be a problem. These invisible problems are caused by something toxic that has settled in the ground. A look back at the previous occupants of the building, the messy neighbors and the chimney down in the street, combined with a look at old aerial photographs – forms a so-called Phase I environmental report.
In general, this is the trick and provides clean health. When environmental concerns arise – such as stained concrete or garbage cans – a second phase is put in place. Soil boreholes are sampled and tested. The recommendations range from no further action to rectification.
Ever seen a pile of dirt on yellow tape next to a gas pump at your local gas station? No. It’s not an episode of CSI. Ventilation is one way of getting the bad stuff out of the ground. Allow $ 2,500 for subsequent phases if refurbishment is required.
Legal: You want an attorney to review the sales contract and title commitment and prepare your LLC incorporation documents. Budget around $ 10,000.
Escrow and title: Sure, the seller pays for a standard policy, but any lender or extended coverage is your responsibility. Plus, you pay half the escrow fees. Another $ 10,000, but that depends on the deal size.
Opinion poll: This is not always necessary unless you want extended legal protection insurance. Unregistered easements, abandoned driveways and registered leases are usually not covered by a standard policy. Supply locations, property boundaries and underground lines are also clearly displayed. $ 5,000 is reasonable.
Credit points: In addition to the interest payments due over the life of your debt, you pay a percentage of your loan amount to the bank. 1-2% is pretty typical.
Separation of costs: One of the really cool things about owning commercial real estate is depreciation, which lowers your income tax burden. The improved part of your property – the buildings – can be depreciated on a straight-line basis over 39 years – 1/39 per year. But other components of the improvements such as walls, doors, glass and air conditioning have a shorter useful life and can be written off earlier if they are properly separated. Usually your CPA can help with this. However, she wants to be paid. $ 15,000 seems fair.
Once you become the owner, collect and total your receipts. Add everything you spent to the 10-30% deposit. The result is the “real” investment in your purchase.
Allen C. Buchanan, SIOR, is a Principal at Lee & Associates Commercial Real Estate Services, Orange. He can be reached at [email protected] or 714.564.7104.