Buying a Building to House Your Business? Stop and Consider This First.
As I mentioned in a recent article (“A Look at the Pros & Cons of Investing in Commercial Real Estate“), there are multiple ways to invest in commercial real estate. If you run a business, one strategy is to own the building your business operates in.
Some of the benefits of utilizing this strategy are the tax advantages, additional cash flow or savings (no rent increases), and even having more control over the condition of the space (updates, repairs, etc.).
If you own the property in an LLC (limited liability company) and the business makes lease payments to that LLC, the tax-advantages are two-fold. The business can deduct the lease payments as a normal business expense, and the owner through the LLC is able to depreciate the building, as well as show any expenses as deductions.
That said, before you jump in and make the long-term investment of purchasing a building for your business, remember this decision is not to be taken lightly. Here are few things to consider first.
How stable is your business? Many businesses fail within the first five years, so make sure your business is stable enough to make a long-term investment like commercial real estate.
You may already know what your company’s current needs are, but what about its future needs? What does your growth path look like? If your business is rapidly growing, it’s possible that you could outgrow the space.
The good news is that if you do outgrow the space, you may be able to rent it out. Another option is to purchase a property you can potentially grow into and then rent out portions of that property to other businesses if needed.
Related: Why Consistency is the Magic Ingredient to Ensure Your Real Estate Business Grows
Commercial space can be overbuilt, though, especially if job growth is slow or even declining in your area. I’d recommend doing your due diligence on the deal just as you would if you weren’t going to be the tenant.
Use of Capital
Is purchasing the building the best use of your capital? Is the ROI (return on investment) or money saved by owning the building greater than the return you or your business could make investing the capital somewhere else?
One of the downsides to owning your own building is the down payment required to purchase the property. This could tie up a business owner’s funds for a while as he/she waits for the property to appreciate. In some cases, it may make more sense to use the money to fund the growth of your business.
My Take on Buying a Building for Your Business
With my previous company, it was more cost-efficient for me to own the building we operated in. Before purchasing the land and custom building the space, we were operating out of smaller units. Due to demand, the location of our jobs shifted from our county to the adjacent county, and I was paying ride time for my employees to travel to and from the jobs. These extra expenses quickly added up, and I realized we needed to move. Not only could I save money on ride time if I owned a building in the next county over, but I could also save on rent while building my real estate portfolio at the same time.
Would I do it over again? Yes.
Even after we moved out of the property, I kept it as a rental. I’ve had many different businesses in there over the years. There’s a high demand for the space, as it competes with storage centers and has parking as well.
Would I purchase a building for my business now? Probably not.
For my note business, it doesn’t make as much sense for us to purchase our building. Sure, we’ve been in business for 10 years, but we’re committed to funding our growth. We also have the ability to invest the money at a higher rate of return in the products (notes) our company buys and sells.
Related: Success Without Fulfillment is the Ultimate Failure: Why Giving Back is Vital to Good Business
I do think that owning the building may make more sense for some businesses than it does for others. For example, it may be perfect for a dental practice, where there’s a set number of dentists who can each handle a set number of patients. For the dentist, owning the building could be another stream of income, and it could continue providing cash flow even after he leaves the practice.
What’s right for one business may not be right for another, though.
If you’re getting started in real estate, or if you run another type of business, would you consider owning the building you operate in? Or do you have another investment vehicle you prefer instead?
Leave your comments below!