The term “fixer-upper” has long been associated with residential homeowners, and you have probably never thought how it might apply to business premises.
This, however, might be an oversight and a fixer-upper might be just the thing your business needs.
Below, I’ll go through the most common questions entrepreneurs have when considering a fixer-upper, so you can see if this idea may be suitable for you.
How can a fixer-upper be defined?
Most business properties need some kind of work done to them before they can be used. The empty space has to be transformed into something that is genuinely useful for your business.
For example, outfitting a kitchen for a restaurant or installing display units for a retail store. So these kinds of tasks, which focus on making your business compatible with the space, are not considered fixer-upper worthy.
A fixer-upper should be premises that need more than basic outfitting to suit your business. There may be problems with drainage, structural issues, broken windows, or old pipework that doesn’t perform as it should.
As well as outfitting the space for your business, you’ll need to take care of these renovation tasks. This can involve a variety of different construction-related tasks, from small fixes like replacing windows to using earthmoving equipment to completely redevelop the whole site for your use. If these kinds of tasks are required, the premises can be considered a “fixer-upper”.
How can a fixer-upper be beneficial to businesses?
In business, you will always have fixed costs. These are the non-negotiable costs that you have to pay every month to keep your business active. If you’re looking to increase your profits, examining your fixed costs and ensuring they are as low as possible is essential.
One aspect of your fixed costs that is always going to be a substantial debit is the cost of your premises. Whether you own or rent your commercial space, you’re going to be paying for it, either to a landlord or to a mortgage company. The less you pay for your business property, the lower your costs, and thus the higher your profit.
Fixer-uppers are, by their very nature, more affordable than other types of premises. You may be able to grab a deal, because no one else is willing to do the work to get the space up to a usable condition.
Is the financial benefit of a lower rent/mortgage really going to be viable, given I have to finance the renovations?
A worthwhile question, and one that sadly cannot be answered definitively. When considering a fixer-upper, there’s no advice you can read that will be able to tell you whether the deal you are considering is a good one. The situation is just too subjective. There’s every chance the deal is a great one and you’re going to save a fortune even when you have factored in the cost of renovations, but there’s also a chance you could end up out of pocket.
The only option is to calculate the finances on a case-by-case basis. Here’s how you can do this.
- Ask a commercial estate agent to appraise the premises. You want to know how much it would be worth if all the basic, key renovations (not standard outfitting) had already been performed. You’ll need to know what the rent/purchase price would be in this scenario.
- You now need to compare this to the rent/purchase price you are being asked to pay. There should be a discrepancy— if there isn’t, then you’re being overcharged, and should look elsewhere!
- Obtain a quote for all the work that needs to be done to improve the premises to your standards.
- Ensure that the work involved in the renovation is still within that discrepancy.
Here’s an example of a good deal, based on a three-year lease.
- The cost of the lease is £20,000 over three years for the premises in bad condition.
- You’ve asked an estate agent for a quote on what the premises would be worth if they were in good condition. They have told you a three-year lease would likely cost you £40,000 if the renovation work had been completed.
- You have been quoted £10,000 to complete the work on the premises.
- This is a good deal. After three years, you will have paid £30,000 (the lease, plus the cost of the renovation) for a lease that is worth £40,000.
- Thanks to a little inconvenience while the work is done, and having to organise it yourself, you’ve saved £10,000.
To make this kind of maths work, you’ll need to ensure you can complete all work within 12 months. Any longer than this for renovations to be completed, and it’s unlikely you’ll be achieving true value. So much of your time within the lease will be spent on a building site while the renovations are performed, which isn’t ideal.
Is the cheaper purchase price the only benefit to opting for a fixer-upper?
Not at all, there are a few other reasons to consider.
- You’ll be able to trust that the building is safe and meets your standards. You will have been in charge of the work.
- You’ll be able to use the space exactly as you need. For example, if there are structural issues that you have to resolve, you may be able to erect or demolish a non-load bearing wall to suit your preferences. It is unlikely this would be permitted in standard outfitting.
- When renting, your landlord will usually be delighted that you’ve undertaken the work, which could lead to a positive professional relationship and discounted rent in the future.
Overall, opting for fixer-upper business premises is a genuine option that is well worth considering. While there are undoubtedly elements of risk to this choice, these are counterbalanced by the possibility of being able to lower your costs and achieve a more affordable price. It’s well worth considering giving a fixer-upper a go the next time you’re looking for a new property for your business!