You may have found an attractive business or commercial property that seems like it will be a worthwhile investment. However, buying commercial real estate can rack up more costs than just the property itself. In spite of your planning and due diligence, additional expenses may suddenly emerge.
As The Motley Fool explains, buyers can account for possible cost contingencies by putting aside a separate set of funds. You may not need to use this additional money, but it could come through in certain situations.
Renovation or repair costs
After acquiring a property or business, you probably want to start making changes to it. These alterations may include some or all of the following:
- Firing and replacing existing management
- Repairing or rebuilding the existing building
- Adding on to existing structures
- Paying zoning expenses
These costs could be more expensive than you first envisioned. There is also a debt service to consider. If it takes a while to pay back suppliers and contractors, you could pay extra interest fees.
Whatever you plan to do with your property, be aware that your timeline may run into delays. Supply problems, a lack of financing or economic factors may drag out your planned repairs or renovations. Along with setting aside money for these contingencies, you may benefit from making backup plans for possible delays.
Negative cash flow
Some buyers acquire a business and start earning money right away. However, your commercial property might not yield a positive cash flow at first, or you may choose to draw on your profits for your property improvements. Having extra funds could be of assistance until your business attains profitability again.
It is possible to regret an investment if you end up with too many expenses after you buy it. Factoring in some possible expenses could help you feel better about purchasing a commercial property.