Business Purchase with Real Estate

[Ben Morris]

Background: I am in the process of buying a business. The business purchase will be funded by an SBA loan and is in the same industry that I already own another business. I am very comfortable operating in this space and I am confident in my ability to be successful in the business. The owner will sell the property for tax value and will owner finance the property. I will be in for about $40,000 of my own money for the business and the SBA loan will fund the downpayment on the property. 

The Question: The property is divided into two parcels and the owner can sell the other property separately, but would prefer to include it. The main property is priced at $556k and would cash flow $1000 per month based on market rents (although I would be renting to myself). The smaller property is priced at 218K. I think it makes sense long term but would be cash flow negative in its current condition. The value of the second property is in the land and the current structure is not in a condition that it makes sense to put any substantial amount of money into it. It would eventually need to be demolished and something else built in its place to make it a cash flow positive property. With limited repairs it would likely rent for around $1000/month which means that I would be around -$400 cash flow. I like the long term prospects of the town and I wonder if owning the land corner to corner on the main road of a great small town in North Carolina that is growing and has high incomes and property values (compared with surrounding areas) would be worth the short term negative cash flow. The Medium-term plan would be to fix up my main building first while renting out the smaller building on a shorter-term lease. After the main building is fixed up demolish the small building and build something else in its place. I feel like owning the whole corner will give me more options for long term development. I would love to hear feedback on any aspect of this. 

[Ujwal Velagapudi]

@Ben Morris Without knowing all the numbers, I still think the first business should be a priority as you don't want a different landlord who can eat into your business cash flow or having unfavorable terms. The seller offering to seller finance it also seems favorable. 

For the second property, it seems like a lot of hassle right now. If you really think it is viable, but don't want the headache right now of a new project, you could request for an option to buy. For example you can pre-negotiate the terms and have an option for 2 years to purchase if you want at the fixed rate. Or you could just not proceed with it right now, and if you think it has little value as-is, will sit idle for a while, could drop in value in the next few months/year, etc. then you could possibly negotiate a better deal down the road.