Owning your own building can be a solid strategy for many businesses. Your payments don’t change, you build equity, you can write off the cost of the property and you maintain control.
But owning your own building comes with a lot of questions. When is the right time to buy? How much will you need for a down payment? What if your business changes and you need to sell?
Like most major decisions, the answer is often that it depends. Deciding between owning and renting is much like deciding whether to purchase a house — you need to compare the pros and cons.
Usually, when I show the chart above I get some surprised responses quickly followed by the following questions:
Q: How can I sell my building without having to move out?
A: You can do what is called a sale/lease-back, which means that an investor buys your building and then you pay rent to them and stay in the building. Many companies have tapped into this resource.
Q: What if I don’t want to pay taxes on the equity when I sell my building?
A: The current tax code allows you to transfer your building to a different real estate investment and defer those taxes to a future date.
Q: What happens when I retire?
A: This could be the best situation of all. You can sell your business and have the new owner lease your building from you, providing a stream of income for your retirement.
Q: What if I need all my cash for my business?
A: There are excellent properties for lease that allow you to put down a security deposit rather than a down payment.
Q: What if I am growing or shrinking and don’t know how much space I will need?
A: It might be that leasing is a better option. If you decide to purchase, find a building that can be modified for more than one tenant so you can grow or shrink and lease out the remainder.
Q: I thought an SBA loan took a year — how can I buy in 60 to 90 days?
A: SBA loans are complex, so you need to carefully choose your lender. Those who focus on SBA loans can let you know very quickly whether you are approved and what the timeline is, but 90 days is typically more than sufficient. A qualified commercial real estate agent can introduce you to several lenders who have proven track records.
Q: How can I borrow money for a lease?
A: The SBA has a variety of business loan options available. Your qualified SBA lender can assist you with evaluating these options. Also, some landlords are willing to loan money on top of their standard allowance to help you pay for customizing a space for your business.
Q: I want to focus on my business. If I buy a building, won’t that make me a property manager?
A: Since this is your business investment, you can write off the cost of a property manager in the same way you write off your utilities and property taxes. When there is a problem, you call your property manager just like you would call your landlord.
Q: How does my cost decrease if I own my building?
A: Your cost is not your entire loan payment. It is the interest portion. And just like on your house or car loan, the interest decreases each month — putting more money toward the equity in your building.
Q: When is the best time to buy or sell?
A: There are lots of factors that go into making either decision. You should discuss this with a qualified commercial real estate agent and your accountant.
Q: How can I tell if it is cheaper to lease than to purchase for my personal situation?
A: A qualified commercial real estate agent can help you and your accountant to analyze your personal financial situation to make that decision.
Q: How do I know I am working with a qualified commercial real estate agent?
A: There are a number of factors to consider. You can ask your agent what percentage of their personal business is commercial sales and commercial leasing as opposed to residential. You should also ask what percentage of their brokerage business is commercial to make sure they have the specific data and resources to get you the right service. Finally, there are added levels of education that can further qualify some agents. For example, a CCIM is a certified commercial investment member who has gone through extensive education in commercial real estate financial analysis. Someone who has worked for a number of years and completed a number of commercial transactions can also provide the same educational level as any certification.