Financing a Building Purchase
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A woodworker's landlord is selling the property, and the tenant wonders if he can afford to buy it. January 9, 2008
Question
We currently rent our shop space. The landlord is now likely to list the building for sale. I have some interest in purchasing, and am aware of many of the advantages. However, to those who own their buildings, how the heck did you manage to post a 25-35% deposit?
Forum Responses
(Business and Management Forum)
From contributor S:
If you have the equity in your home, borrow on that to get the shop building. You should be able to get a commercial loan with 15 to 20% down if you are showing enough profit over the past 3 years to be able to afford the purchase. Home mortgages go for less than commercial. If you don't buy the building, expect a large rent increase upon the end of your lease.
I bought my building 20 years ago, and now it's financing my retirement to the tune of almost $5K a month for no effort on my part. Best investment I ever made.
From contributor A:
SBA will require only 10%, but the paperwork and intrusion into your business is more intensive, and the bank/closing fees can be very significant. I just did an SBA, but wish I had the resources to go conventional. You will need a fair and simple accountant to help with all the reporting, no matter which way you go. If you currently have a business relationship with a bank (equipment loans, line of credit, etc.), talk to them to see what kinds of costs you will incur, and how you plan to pay for the building.
From contributor L:
After leasing for quite a few years, I bought my shop. I've added on 3 times and now am about out of land to do any more. Sure wish I had considered the land before getting in this far. As it is, it would cost a lot to move to a new site. Trapped! I lease the shop back to my woodworking company from a separate corporation. It will finance much of my retirement.
From contributor T:
My company provides business consulting services for the wood industry. If it were my business, I would buy the building in my personal name and rent it back to the business. This allows you to pull a little more income out of the business while building all of the equity for the building in your name.
From contributor J:
Expect a rent increase shortly after the closing, since all leases are null and void with the sale of the property.
From contributor X:
I have found in the past that a conversation with your landlord can work wonders in your situation.
Questions that need to be asked:
Do you want a fast sale?
Will you carry the note?
Once sold, will you just put the money in the bank and draw interest on it?
Would you carry a second note on it for the down payment?
I bet you could work out some kind of deal with your landlord. Find out the whys and let him know that you're very, very interested in his property. Pay him a little bit more in interest than he can get at a bank for carrying the note. You can always refinance later for a better rate. Should you default, he would still have his property and be a bit richer. Besides, it's all deductible. Just ask if something can be worked out. I did, and acquired numerous properties this way.
From contributor L:
You would have to check in your state but here, the sale of a property does not void a lease!
AI enhanced answer (added Feb 21, 2025):Financing the purchase of a building for a woodworking business can be approached through several avenues:
1.
SBA Loans: The U.S. Small Business Administration (SBA) offers loans like the 7(a) and 504 programs, which are designed to help small businesses purchase real estate with favorable terms, lower down payments, and longer repayment periods.
2.
Commercial Real Estate Loans: Traditional bank loans for commercial properties often require a substantial down payment (20-30%) but can offer competitive interest rates. These loans are typically structured with fixed or variable rates.
3.
Owner Financing: Sometimes, the seller might agree to finance the purchase themselves, allowing you to make payments over time directly to them, which can bypass traditional lending hurdles.
4.
Private Investors or Angel Investors: If your business has a solid plan and potential for growth, you might attract investors who provide capital in exchange for equity or a share in future profits.
5.
Crowdfunding: Platforms like Kickstarter or GoFundMe can be used not just for product launches but also for raising capital for business expansion, including real estate acquisition, by offering rewards or equity.
6.
Retirement Funds: Using a ROBS (Rollover for Business Startups) allows you to invest your retirement funds into your business without penalty, though this comes with significant risks and should be approached with caution.
7.
Grants: While less common, there are grants available for small businesses, particularly those in underserved communities or specific industries, which might not need repayment.
Each option has its pros and cons, and the best choice depends on your business's financial health, creditworthiness, and long-term strategy.
