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Create Personal Wealth Beyond Your Small Business, Part 3 |
The Small Business Real Estate Wealth Building Strategy
Thus far I have been talking about the advantageous financing that a small business person can access to acquire real estate for business use. Before doing so, you have to be sure that it makes sense to own your business location, rather than lease it. Lets look at the reasons for buying business-occupied real estate versus leasing.
Reason 1: Control
When you own the location for your business you have a greater degree of control over what you can do with the space. In lease situations, you always have a landlord who is concerned with the condition and state of the property who may attempt to limit your use.
Reason 2: Diversification
The business real estate is a separate asset from the business itself. In purchasing the building, you have automatically diversified your asset base. Now a portion of your net worth is in commercial real estate and on a different growth path than your business.
Reason 3: Equity Creation
When you make those monthly lease payments you are doing your landlord a great favor by either helping him pay down his loan or increase his net worth. Either way, that money is put to better use if YOU are the one whose loan is being paid down, building your equity in the property.
Reason 4: Payment Assistance
Wouldnt it be nice to be the owner AND a landlord at the same time? If at all possible, try to purchase a building with additional space for other tenants. You can use their cash flow to help you acquire a larger property, pay down your loan faster, increase your personal cash flow, or a combination of the three.
Reason 5: Estate Planning
Since the building is a separate asset, there are different approaches to managing its position in your portfolio. Common strategies include putting the building in personal or trust name and leasing the space to your business. Also, keeping the building in a separate ownership name gives you some further protection in the event things dont go as planned with the business.
The Wealth Building Strategy
From these reasons it should be fairly straightforward to derive the small business owners real estate wealth building strategy. First, look for a property in which to locate your business. The property should meet your business immediate and medium term growth needs.
Second, attempt to find properties that can accommodate or have existing tenants for payment assistance. Obviously, this step should not conflict with the first one. However, a little patience in finding a multi-tenant property that you can use for your business will pay off significantly down the road.
Third, acquire the property with advantageous financing that maintains working capital at acceptable levels and allows for accelerated pay down of the loan principal for equity build-up. In other words, assuming it makes sense, get high leverage or LTV financing that keeps cash in the business. At the same time, make sure that the loan you obtain allows for extra pre-payments without penalty so that you can accelerate equity growth in the property and increase future cash flow.
Fourth, position the property to meet your estate goals. How you take ownership will have a significant effect on your estate planning. You should get both your tax and estate planning advisors involved before you close the purchase escrow.
Fifth, implement and accelerated repayment strategy to maximize equity creation. As mentioned in the third step, this is where the smart investor uses his excess cash flow to reduce overall interest expense on the property and increase equity. Properly reversing the amortization principal used by lenders reaps massive gains in wealth over relatively short periods of time. I will cover this topic in the next article.About AuthorWANT TO USE THIS ARTICLE IN YOUR E-ZINE OR WEB SITE? You can, as long as you include this complete statement with it: The Investment Property Insider is published by Craig S. Higdon, a veteran commercial mortgage broker. He publishes the weekly e-zine and blog, www.InvestmentPropertyInsider.com, for commercial real estate investors, developers, and industry professionals. Visit the blog and get this free report: The 7 Biggest Loan Mistakes Real Estate Investors Make And How To Avoid Them.
Source: ArticleTrader.com
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