Buying Or Leasing Commercial Real Estate In Cincinnati, OH
Are you new to the commercial real estate for sale and lease in Cincinnati, Ohio? Welcome to our thriving community! There’s no better time than now to start seeking out commercial real estate in Cincinnati.
Whether this is your first or tenth time purchasing property in our fantastic city, investing in commercial properties for sale or lease comes with a set of unique challenges. With this in mind, we have drafted a comprehensive guide to help make the process easier and more successful for you.
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Is it better to Lease or Own Commercial Property in Cincinnati?
Purchasing commercial real estate is a complex process not only for business executives or entrepreneurs that are experts in other industries, but also for the real estate experts to time the right time to maximize the value of their investment. As a venture, it’s rifle with risk, as different sellers, buyers, and renters can all suffer the consequences of a spike or dip in demand. Still, the potential rewards of an upside can be substantial.
So, why should businesses buy? Well, one of the key benefits is that buying gives the business more control over the cost of overheads, compared to leasing where you can be easily victimized by the market in case the lease rolls over at a time when the market is tight, leading to higher rental costs. Second are the investment benefits, which include asset appreciation over the longer term and the depreciation of the property for tax benefits.
Nonetheless, before making that decision, it’s important that you understand the potential risks involved. Of course, you don’t want to find yourself in a situation where you realize a year or two later that it would have been better to lease the property. The following are some of the potential risks of buying:
• The location might backfire: The neighborhood that’s considered “hot” today isn’t guaranteed to stay “hot” tomorrow. Keep in mind that locations are trendy, and gentrification can potentially stall, or the market can go bust. Nonetheless, the reverse can also be true, especially in Cincinnati real estate market.
• Tenuous cash flow: sometimes, buildings can be in need of expensive, unexpected repairs, and other times, tenants stop paying their rent. Your cash flow might become compromised, especially if you have to hire an attorney to handle the tenant situation and facilitate the repairs simultaneously.
• Lost liquidity: when you buy real estate, you may end up tying much of your liquidity. It’s not always easy to sell real estate, especially in an economic slump. Still, businesses that own real estate will at least have something to sell when they need the cash.
To be fully aware of the risks, it’s important that you do your homework. Ideally, you should be hands-on when undertaking your due diligence for the commercial property, before signing any contracts. Otherwise, you might overlook huge problems that you’ll only come to discover after it’s too late.
Ultimately, the decision on whether to buy or lease will come down to the economics. It’s important to hire a real estate expert in Cincinnati, Ohio to help you with the buy or lease analysis, since they are able to factor in the local real estate market trends and the growth forecasts of your business. They can also help you determine the costs of buying vs. leasing, taking into account tax benefits such as depreciation.
How to Assemble a Team of Experts
It’s likely that you are not an expert on commercial real estate. As such, it’s important to get the right team of experts. They will help you determine the right locations to consider, the right time to buy/sell, and the pitfalls to avoid. Some of the experts you’ll need include:
• Lawyer: an attorney will assist you in completing the transaction correctly, negotiate with the lender and seller on your behalf, and facilitate any legal aspects of the transaction.
• Accountant: an accountant is your best bet in figuring out what your business can afford, and analyzing the operation and tax benefits of either option.
• Mortgage broker: a mortgage broker or lender will help you in sorting through the various financing options available to you, from bank loans to loans guaranteed by the government, such as the Certified Development Company 504 program that’s meant for financing real estate and equipment.
• Commercial broker: this will help you to discover potential properties and what your business can afford.
A professional commercial property appraiser is also an important hire, to help you evaluate the property before committing your money. A professional property appraiser in Cincinnati will help you learn details such as the exact size and overall condition of the property. They will also highlight how the property compares to others, which should help you determine your purchase price.
The importance of appraisals for commercial real estate was exemplified during the recent reassessments conducted all over Ohio. Cincinnati underwent its property reassessment in 2017. The subsequent tax increase that was determined by the County Auditor’s office caught many property owners by surprise.
Without the serious work that independent commercial real estate appraisers do in challenging the new tax burdens for their clients, many property owners would be paying increased taxes unnecessarily. As such, it’s recommended that you obtain a commercial appraisal regardless of the guidance from the Department of the Treasury.
How to Make Sure that the Investment Pays off
If you’re purchasing commercial property in Cincinnati for the first time, have these three letters in mind: ROI. While ownership is certainly exciting, it can quickly lose its allure if the market is sinking.
Nonetheless, the Small Business & Entrepreneurship Council named Ohio as one of the top 10 states that are entrepreneur friendly. As such, Cincinnati is a great place to invest. With that in mind, you can avoid a “doomsday” scenario with these 5 tips:
1. Make sure the location is suitable for your needs
It’s usually best to begin your property search in a community that you are already familiar with. Many commercial real estate investors naturally start by purchasing property that’s already available in the area they reside, due to familiarity. Previous exposure to a region or city helps to eliminate much of the work involved in research, which entails knowing the general population, major employers, its main attractions, etc.
When you have a keen sense of these factors off the bat, you’ll be able to easily determine and predict the economic atmosphere. However, if the neighborhood doesn’t suit your needs or doesn’t seem to be ripe for investment, do the necessary research for other locations.
To help you assess the area in question better, here are some questions to ask:
• What’s the current market climate for commercial real estate in the area? Is it stable, growing, or declining?
• Does the area have a business-friendly environment? Evaluate factors such as the average revenue for the local businesses, the number of businesses with paid employees, etc.
• What’s the rentability of the area?
• What are the prospects of the area? What’s the area’s cost of living?
• What industries are strong in the area? How is its current job market?
• How is the local economic health? Find out the housing costs, median income, and unemployment rate of each area.
As a state, Ohio has so much to offer for prospective real estate investors. It ranked in the top 10 on the “2018 Best and Worst States For Business” by Chief Executive magazine. Ohio is also known to have some of the best taxation and regulations, living environments, and high quality of workforce, which makes it extremely valuable to startup firms, large enterprises, and homebuyers.
2. Determine your Cap (capitalization) rate
The cap rate is fundamentally the relationship between the net income of a property with the property’s purchase price. For commercial real estate, the cap rate is an effective way of determining the potential ROI of the property.
The basic equation for calculating the cap rate takes the annual rent of the commercial property and subtracts all the yearly expenses (utilities, maintenance, and management). Be sure to include the cost of vacancy �” the amount of time the property might not be fully occupied – as an expense. Once you determine the net income, divide it by the purchase price.
According to Realtor.com, the optimal cap rate percentages are between 4% and 12%. Please note that commercial properties that come with high percentages (over 12%) can be as risky as those with low percentages (under 4%). As such, it’s best to check other factors, along with the cap rate.
3. Outline your Role
Property management is a critical component of your Cincinnati, Ohio commercial real estate investment. Therefore, you should determine how you will be involved in the daily management of your property.
If the property is solely for business purposes, be prepared to keep the space occupied. The utility fees, mortgage payments, and maintenance costs will all be on your shoulders. If you’re leasing the commercial property to tenants, you have two choices: you can choose the be the landlord and handle the daily responsibilities, or hire a property manager to do this for you.
Hiring a property manager is recommended, especially for the first time buyers. It takes a lot of work at the start to find the perfect person to manage your investment. Nonetheless, albeit the extra costs, a property manager will make ownership a little less stressful.
Performing Due Diligence to Evaluate the Property
Once you have located a suitable property, you can now go to contract and begin a one to two month for conducting research. This is the time to revisit your objectives, and figure out if the property you have identified meets your pre-set objective.
Beyond this, your team of professionals and trusted advisors will come in handy. A broker can help to bring third parties such as appraisers, engineers, and environmental analysts to verify the condition of the property, how it has been used previously, its structural soundness, potential liability issues, and whether there are any necessary upgrades.
Make sure that you are involved in the process to ensure that there isn’t any potential for changes in the adjacent properties that could affect the value of your property or business negatively, such as infrastructural or road construction, developments, etc. A title company can help to ensure that there are no existing or prior insurance or litigation issues affecting the property. In case you find any problems, you’ll have the opportunity to re-negotiate with the seller or walk away from the deal.
Making the Purchase
Now that you have found a commercial property in Cincinnati, OH that suits you, and you’ve worked with the owner for the right price, the next step is securing the necessary financing based on how much cash you have to put down and how much you need to finance.
Your accountant and lawyer will play key roles here to make sure that the contracts are as detailed as they should, and that they are structured to your advantage. It’s advisable to envision every possible contingency and ensure it’s covered sufficiently, clearly and unambiguously within the contract. You need to understand everything from the air rights and various zoning laws to the nuances of tax requirements and existing tenant leases. Verify and validate the terms associated with the purchase, before pulling the trigger.
At this point, it’s wise to recheck and update your original business plan by covering the specifics of your new acquisition. That’s how your plan will come to life. When you finally complete the purchase, it’s important that you implement the plan without procrastination. Time is of the essence here.
Make sure that you have established that purchasing is the right path for your business for the long term. Think of what could happen in the first one or two years after buying that would make the purchase a mistake. Plus, take care not to overshoot the amount of space you need or be aggressive with your growth projections. If your business doesn’t keep up with these, you’ll inevitably have a problem.
With all the information and tips we’ve listed above, we’re confident that you have the necessary information to find the right Cincinnati, Ohio commercial real estate for sale and for lease. As mentioned earlier, it’s best to work with an experienced commercial real estate company and the right professionals to ensure you’re making the right decisions.