What should this reader do?
Read his story, make a selection, and leave a comment:
We are renting the commercial condo that our business is in for $1,800 per month, we can buy it for $160,000 should we?
We like the building, the location is a bit hard to find, and with a 20% down it will really cut down on the monthly expense but I will eat up $32,000 that we could use to expand the business. I don’t have $32k but I have a friend who offered to lend me half of it, I do have half.
We currently average $15k a month in sales, other than rent we have about $1000 in fixed expenses, I pay myself $2500, and we average about 25% for costs of goods sold. We currently have staff that costs about $2000 per month. This gives us about $4,000 of extra money at the end of each month….so far with this extra money we have bought lots of extra inventory to the point that we have enough, we have bought a commercial truck, the business is 100% debt free and has about $5,000 in liquid assets saved up (And we personally have over $10k), along with 30k in inventory and 10k in tools and equipment. Personally we are debt free other than the house, student loans and car….but with the house at 2% interest and the car at 2.9% and the student loans at 3.25% I don’t see any reason to send any of them more then the minimum because we make 4 times on most inventory that we buy.
So is now a good time to get the building? Or should we keep our cash free to keep buying things that are our core business? We are not in the business of real estate so should we own or rent?
Now, I’m not yet sure exactly what advice to give him, yet, so leave a comment and help us BOTH out 🙂
I’m voting not enough information.
What are the growth plans for the business? Will they require moving out of the condo?
With it being a condo for sale instead of the whole building, what are the association fees and how have they changed over the years?
Overall, I’m leaning against it unless there is a way to cash flow it through the business or reduce the down payment required or buying the whole building. A friend helping with the loan becomes a business partner making decisions on what you are doing with the business.
Why are they selling it? Is there something they are not telling you?
Otherwise you said it yourself “It’s hard to find”
Commercial RE is all about Location,Location, location…
If you focus on building your business you can eventually find and afford the ideal location.
Don’t take your friends offer for the down payment.
I would let this offer sail down the river. Focus on growing your business.
More information would be helpful, but that seems like a good price for $1,800/mo rent. Business or no business, I would take that deal every time.
Save up the money with cash flow from the business, then make the down payment.
You have a choice to make- save cash flow by owning instead of renting or continue to use that cash to reinvest in the business and ignore the ownership option.
Renting also offers the benefit of being more open to relocation. Do you know for sure that you will stay in that location for 5-7 years, even after your business expands?
You need to think both tactically and strategically on this.
Dont invest in something you dont know much about, you know your busniess invest in that pass on what you dont know.
Reinvest that money into expansion, and defer the purchase for at least a couple of years. I say this for a few reasons:
1) Your net cash flow and savings is too low to be worrying about a large capital investment like the building, and that is taking into account the VERY modest wage you take from the business today.
2) With no reasonable “slush fund” in the business ($5000 is not enough), how will you pay for a large assessment if something major happens to the building? eg. roof/parking lot/heating or cooling systems
3) Finally, this is the one that really closed the deal for me – “we make 4 times on most inventory that we buy”. So you’re saying that if you invest the $16,000 you have into sales of your existing inventory, you can turn it into $48,000! ($16,000 x 4 = $64,000 minus COGS %25 = NET $48,000) This is a no brainer for me – your real estate investment will not give you anywhere near this type of return on investment.
My advice to you, is to not be in such a hurry to acquire new debt. Even though this purchase will reduce your monthly expenses, the higher ROI is within your business. The building purchase would also eliminate 100% of your savings, completely handcuffing your opportunity to grow the business faster until the building is paid off.
Not really enough information to assess either the prospects of the business growing (or surviving for that matter) or the real value of the property.
SBA 504 loan. Lower down payment requirements, but dealing with the SBA is not that fun.
Ok. There are a lot of questions here. I am the one that this question is about. I will give more details. Thanks for all of your help and interest.
We do make 4 times on what we buy, BUT there is a limit to how much we can find to buy per month, currently we can only buy about 4-5k per month of used items, if I was willing to make a smaller margin I would be able to find much more.
It is 3000 square feet. When we moved in 18 months ago, moving up from a 1000 square foot location, this place seemed very empty, but a year later it was quite filled out, and not we are actually overflowing with used computers. BUT the suite next door is an empty shell and can be bought right now for just $110,000 and is 2900 more square feet. We now have over 300 computers that could be sold, 200 of which need to be made ready, we are short of manpower, but still sell way more than enough to pay all the bills, and have money left over to invest and grow.
The fees for the association have only changed by about 2% over the 5 years the building has been here, and now that occupancy has gone up they are projecting it to go down.
They are selling because they are flippers, that is their business model, they bought it cheap in Jan of 2013 when the builder went bankrupt, and they want to sell them by the end of 2013 to invest in other things.
The offer from the friend has been pulled because he bought a house and used the money for that. But we do currently have about 10k saved up and save up 2-3k more each month. We also could have a large sale to other people in the industry and raise 10-15k fairly quickly.
I tried the SBA route but can not qualify.
I always figured that if we moved out for any reason I could rent this suite and make 800-1000 cash flow.
Also I think there is a dollar bubble, and when that bubble pops we will have a large amount of inflation, making the business more profitable, and the debt easier to pay back…but if I am still renting they will not sell to me for this low of a price and whoever owns it when my lease expires will likely raise the rent.
But also there is a clause in the lease that says that after the lease is over the rent will be $1870 month to month…there is no end to the month to month but the reason we left the last building is because we were month to month for 5 years after our last lease was up and then the landlord wanted a new contract at almost double the rent or else we needed to leave…we left.
Thanks again for your help.
“we can only buy about 4-5k per month of used items, if I was willing to make a smaller margin I would be able to find much more.”
@ Jason – sounds to me like finding stock is the bottleneck in your business; remove it & there may be no limit to how much you can grow!
Example: if you reach your limit in any particular month, you can afford to take a smaller margin on additional stock/sales.
Remember: Net Profit = Gross Profit once fixed overheads are covered 😉
If we found more places to buy stock we could buy more, but it is really limited by my time currently.
@ Jason – “Work on your business, not in your business” [Michael Gerber, The E-Myth Revisited]
I voted to buy:
1. Does he plan on staying in this location for more than five years? With a purchase, an overly conservative estimate of a 15-year loan at current rates brings his payment down to $1200/mo. He’ll more than break even during that time while simultaneously securing a low fixed cost to bring business stability and lightening the psychological load of one of his biggest fixed costs for the long-term. I rent an office for my small business for about the same amount, and I would KILL (everyone but AJC) for a chance to purchase: it removes the long-term uncertainty of rent and rent money just vanishes every month without building business value.
2. 3,000 Square Feet of commercial space for $160K? For a building that at least one business has been willing to rent for $1800/mo? To me, that’s a bargain. Did I hear you correctly when you stated that the suite next door is 5,900 sqft for $110K? If the suite next door needs no improvements for you to use it, the location is just as good, and downtime doesn’t hurt the business, buy the one next door instead! Geebus where are you people finding these commercial properties?
3. What if the money could have been used for business expansion? To me, with your inventory maxed out, your equipment purchased, and your debts low, it sounds to me that you are at a phase in which you want to sustain cash flow instead of expanding recklessly–I agree that this decision comes down to major differences in business philosophy. Thus, the money could be used for expansion sure, but it doesn’t sound like you want to/are ready to/know how to yet without further data from more sales that more time will give. Thus, stabilize the business by securing a fixed cost in the meantime while you focus on converting inventory to sales.
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