Top 8 Commercial Investments Most Investors Don’t Think About

Top 8 Commercial Investments Most Investors Don’t Think About

Top 8 Commercial Investments Most Investors Don’t Think About

What is Commercial Real Estate?

Commercial real estate is any property used exclusively for business-related purposes, or to provide a workspace rather than a living space. Most often commercial real estate is leased to tenants to conduct some type of income-generating activity. This broad category can include everything from a single storefront to a huge shopping center. While we typically think of commercial real estate as retailers, office spaces, hotels, strip malls, restaurants, and more, this list includes many commercial property investments that often go overlooked and hold ample opportunities for income-generating activity.

 

OFTEN OVERLOOKED COMMERCIAL INVESTMENTS

1. Multifamily

Do you consider apartments to be commercial real estate? Not everyone does. They aren’t used for commerce, per se, but they are an important aspect of commercial investments that should not be overlooked.

There are two apartment classes: residential multifamily and commercial multifamily. Residential multifamily is financed with a residential loan, and the values are based on comps. This typically describes buildings with two to four units. Commercial multifamily is financed primarily through a commercial loan. People often make divisions between small and large multifamily based on the size of the staff necessary to run them. These can include dozens of units in an urban or suburban setting or complex.

2. Self-Storage

Another investment that’s easy to overlook, Self-Storage is an enormous commercial investment that big commercial rating groups often overlook considering there has not been a separate classification for this category in many online reports. Self-Storage facilities can be a personal and commercial boon, as there are nearly 60,000 such facilities in the United States alone, which rivals the amount of McDonald’s and Starbucks combined. Self-Storage has become very important and popular over the last decade, and many commercial investors have noticed.

3. Mobile Home Parks

This is an often overlooked, but very valid commercial real estate class and a sublime investment. Many well-known and aggressive lenders (Warren Buffett among them) realized years ago the investment opportunity of Mobile Home Parks, and how these commercial spaces often go overlooked in lieu of more popular investments. In the midst of the COVID-19 pandemic and stock market fluctuations, the investment power of Mobile Home Parks has increased by a percentage in the thousands and continues to climb.

4. Cell Towers

Investing in cell towers might be a commercial investment many are already knowledgeable of or have thought about, especially since the cellular device boom of the 2000s. Since many companies are constantly on the lookout for better coverage by region, investing in rural dead spots to fill needs is an important aspect of this opportunity.

Investors can earn a steady income from this investment for decades in exchange for a quarter acre of land and a deeded easement of access. One viable way to accomplish this is to buy out someone else’s existing income stream for a direct cash payout from you or invest in another person who does.

This sector has grown further during the pandemic, and will only continue to grow in a world that has an increasing need for cellular data.

5. Data Centers

Data centers have enjoyed a commercial explosion over the last several years. As retail’s demise has accelerated during the pandemic, data center demand has soared. Zoom and other online meeting platforms have pushed the limits of existing infrastructure, and companies are in desperate need of locations to establish new data centers or expand old ones. Emerging technologies such as artificial intelligence and 5G wireless are constantly looking for this sort of space.

Luckily, many investors have not yet realized the potential of investment in this sector. This isn’t a mom-and-pop investment, but similar to Self-Storage and Mobile Home Parks there is room for growth if you have the investment capital.

6. Senior Living

Similar to multifamily living, Senior Living is an important investment sector that can often go overlooked. This isn’t for nursing facilities specifically, though it can include that. Many seniors are looking for independent living communities, similar to apartment complexes, to enjoy their twilight years. The increasing popularity of this sector means more investment opportunities for you. Many who have pursued this sector have enjoyed great results.

7. Billboard Space

Billboards are an amazing opportunity. Similar to many other forms of real estate, it’s all about location, location, location. Some billboard companies pay as much as $200,000 a year for a billboard, which is especially true inopportune locations.

Paying attention to the lease and space is important for investing in a billboard. Many billboard companies are looking to put up permanent megastructures in places that are seen daily, and if you notice a billboard with a video sign it is no doubt going to be there for a long period of time.

Billboard investment has to take into account zoning and property laws, but these can change and some billboard signs are grandfathered into the property. Regardless, billboards are a great cash flow investment that can broadly go overlooked by those pursuing other, more obvious opportunities in the commercial investment space.

8. Urgent Care Facilities

As cities and towns change, peoples’ consistent need for medical locations stays the same. These sort of Urgent Care Facilities are oftentimes located as part of broader retail centers, nestled in between grocery stores and gyms. Numerous hospitals are recommending people utilize these as smart alternatives to expensive health trips, and as others use them to avoid the hospital environment entirely, they increase in popularity. Urgent Care Facilities, especially dialysis locations, are becoming widely popular.

Unfortunately, we will see a number of retailers shutter due to the pandemic, but the good news is that these properties are ripe for opportunity in the new sector. Keeping a keen eye for these sorts of investment opportunities will net important cash flow opportunities. As ever, it is important to keep all your properties up-to-date on their electrical, lighting, signage, and technology, ensuring that your investments last for years to come.

 

About the Author:

Caren Ellis is the Marketing Manager at FSG. Her strong marketing skills and divergent thinking have helped the company to serve thousands of businesses. She loves to share her insights on effective construction technologies, property valuations, and practical solutions to the latest industrial challenges.

6 Reasons to Buy an Existing Business

6 Reasons to Buy an Existing Business

Buying an existing business with an established customer base, sales, financial history, supply chain, website, trained employees and many other attributes can actually generate a stronger foundation to grow much faster than a ground zero start-up could. Taking a business from $500K in sales to $1 million in sales is probably much less expensive and faster than getting from $0 sales to $1,000,000.

First generation entrepreneurs typically find that jumping in to an existing business is far more advantageous, personally gratifying and offers a quicker financial return than building from scratch. Michael Gerber, author of The E-Myth Revisited found that 40 percent of new businesses fail in the first year, and 80 percent fail within five years. This would be a big leap of faith for most budding entrepreneurs.

If reducing the investment risk and creating opportunities for bigger profits sounds like your career path to be your own boss, then consider purchasing a successful, existing business.

Benefits of Buying an Existing Business

  1. Cash flow is king.

If you buy an existing and profitable business with a sensible deal structure, the business will generate a reasonable salary for you as well as some excess cash that you can invest in growing the business. Start-up businesses are famous for burning cash for years and most run out of cash before they get to breakeven.

  1. Financing

Buying a profitable business with proven cash flow for a fair price means you can likely buy the business with an SBA Loan Guaranty. This means, if you qualify, you could own the business for as little as a 15% down payment. A business selling for $400,000 could be purchased for $60k down or maybe less.

  1. Don’t repeat mistakes

The seller has likely made a lot of mistakes you won’t have to make. That takes some risk out of the deal, as well as pain.

  1. Apply your skills

In all likelihood you’ll bring some skills to the business the seller doesn’t have. Evaluate the business. Revise systems and processes. Keep the good and transform the bad and you could see a quick boost to profits. Most people think it’s easier to fix a business than start a business. I’ve done both and I agree.

  1. Customers

The seller has figured out what their customers want. You are buying an existing customer base that probably took years to cultivate.  Nurture these relationships. Embrace and foster new ones and you’ll experience an even wider community support base.

  1. Energy for Action

New energy applied to a stagnant business is a great opportunity. You as a buyer will likely be more motivated and enthusiastic than a seller who’s been clipping coupons for years. Energy is highly rewarded in businesses.

Buying an existing business can be a mass of confusing information and opinions but keep in mind, that you are taking a calculated risk which eliminates many potential challenges and the hazards associated with startups.

If you have the will to go through the process it could be the best move you make professionally. As someone once said:

Your worst day as a business owner is better than your best day as an employee.

The Role of Disclosure in the Due Diligence Process when Selling a Business

The Role of Disclosure in the Due Diligence Process when Selling a Business

A business owner who would like to sell their business how they go about the sale can be the difference between a dream ending and a nightmare. There are some things you should know before selling your business.

 

It is important that the buyer and seller know what’s being sold, bought and what known circumstances might affect the performance of the business after the sale.

 

If you’re selling a business your best friend is DISCLOSURE! That’s right disclosure. The role of disclosure in the due diligence process is important when selling a business.  You may want to sell your business but when you do, you also don’t want to be in court a year later with a buyer trying to get the money back.

 

Disclosure is a part of the Due Diligence process. Due Diligence can vary greatly from deal to deal but one thing that doesn’t change is the obligation for disclosure.

 

Disclosure needs to be methodical and complete. During a sale, many business owners ask, “why is the buyer asking so many ridiculous questions?” As a seller, you should answer honestly and if you don’t know the answer tell the buyer that also.

 

Buyer Beware: Unfortunately, there are some sellers in the world who would rather look the other way, close the deal and worry about it later. As a buyer, you need to do your homework before finalizing the sale.

 

Disclosing Material Information

You should also be aware of material information that you should tell the buyer even if they don’t ask. What might that be?

 

Before the sale, you are talking to your largest customer and they say something like “Joe, just thought I’d let you know, starting in January we won’t need your product anymore.”

 

Some sellers might think closing on the sale before the buyer finds out is the best course of action, but it is not. In this case, you need to put in writing this information for the buyer. Could it kill the deal? Yes, but that might be better than the legal entanglements after a sale.

 

Here is what you want to include in disclosure:

  1. Any information the buyer asks for
  2. Any information about actions or impacts that might materially affect the business after the sale

 

There are plenty of situations that could occur. For example, let’s pretend it’s 2 weeks before the sale of your business is scheduled to close. Your top salesperson comes to you and says, “I’m pregnant, and after the baby comes I’m going to take a couple of years off if you need to fill my position I understand.”

 

Yep, you need to tell the buyer that. Losing your best salesperson is a big deal, even if you think they are easily replaced. Any small details that could possibly bring a wave of hurt to the company needs to be addressed before the sale.

 

When you decide to sell your business, you need to go through your business with a fine-toothed comb and be prepared to disclose and discuss.

 

Remember: Bad news about your business before the deal closes is a price problem. Bad news discovered after closing is a legal problem.

 

Buyer’s Responsibility

Along with the seller’s disclosure, the buyer has a responsibility as well. They need to put in the effort and do the homework to ask the right questions so all parties understand.

 

An experienced and qualified Business Broker can assist the buyer and seller in the Due Diligence process but the obligation for full disclosure is the responsibility of the buyer (who is spending a lot of money) and the seller (who is getting the money).

Business Value Can be Managed if the Business Owner Can Manage Themselves

Business Value Can be Managed if the Business Owner Can Manage Themselves

If you read too many business magazines you might find yourself believing that creating a valuable business is more luck than skill. Business value can be managed and if you manage the value you will become more profitable.

Small business owners often confuse business earnings or profit with the actual value of a business. All profits are not created (or valued) equally. A fundamental method of measuring the value of a business is applying a multiple to earnings. Take two businesses that have the exact same earnings of $100,000. Will they have the exact same value to a business buyer? No.

Why not? There are many, many reasons. Here are some examples of why business buyers value earnings differently, we’ll use the $100,000 earnings for company A and B example.

 

  • What is the quality of the earning? Company A earnings have been growing for 5 consecutive years, company B earnings have been down for 5 consecutive years. Which is more valuable?

 

  • Company B financial statements are cleaner than company A and a buyer will pay more for a company with cleaner books because there is less risk. Uncertainty in the quality of the business financial records drives down value.

 

  •  Company A has 5 lawsuits against it, company B never had any lawsuits.

 

  • Company B has well documented processes and it’s easier to train employees, therefore B’s owner can take lots of time off. Company A, with no processes, couldn’t stay open a week without the owner at the business. Which business has lower risk and therefore higher value?

 

  •  I could give you a hundred more variables as to why one business’ $100,000 profit is worth more, or less, than another business’ $100,000 profit.

 

As you can see business value and corresponding multiples of earnings is based on a number of fundamental factors that a business owner can control and these factors effect how valuable the business is. There are many businesses that are very valuable to the current owner but of little value, or much lower value, to a buyer. There have been several good books written about building value in a small business including Built To Sell.

 

Ready to Buy a Business – Your 401(k) could be your best friend!

Ready to Buy a Business – Your 401(k) could be your best friend!

Using 401(k) to buy a business solves a lot of financing problems. Buying a business is a complex and, at times, frustrating exercise. The easy part is finding a business worth buying. The difficult part is jumping thru hoops to get the business purchase financed. Getting financing to purchase a business makes financing a home purchase look like a walk in the park.

If you are buying a business don’t overlook using a 401(k) without triggering a tax bill. There are CPAs who specialize in this investment vehicle. The IRS code currently allows, if structured properly, you to access your 401(k) without triggering income tax or early withdrawal penalties. Consult a qualified 401(k) business purchase rollover expert. Expertise is required to navigate complicated tax laws.

Your 401(k) and an SBA Loan from the Small Business Administration could provide the financing you need to buy a business and build the wealth that is often created when you own and operate a successful small business.

A typical financing structure when buying a business is (20% down often using a 401(k) to buy a business) 75% financing from an SBA loan and 5% financing from the seller.

Typical business acquisition loans are 10-year loans, with interest rates at prime + 2 3/4%. Terms can be improved, if the business purchase includes the purchase of real estate. Purchase of the real estate will significantly lengthen the term of the loan. This can also improve interest rates.

SBA loan terms are typically far better than terms from conventional financing. (When conventional financing is available and most times it is not). The SBA loan guarantee program is utilized by many banks who participate by making SBA guarantee backed loans to individuals and small businesses looking to acquire a business. Here is some info from SBA regarding this option.

Could there be a better investment than investing in yourself?  For free information and complete details click here.