Buy a building for my business or invest in more RE?

Question

I am the owner of a high end automotive business that specializes in customization and restoration, and also have been investing real estate for the last 5 years (MF and SF homes), currently sitting on 24 doors.

I am torn between using my capital to buy my own building for my automotive business (why pay rent, when I can own?) or use that capital to invest in more RE, continue building my passive income. As much as I love the idea of buying a commercial strip and lease out the rest, I need about 4-5000 sq ft of space, lots parking space and in a decent location with lots of traffic.

I love my business, but like all high end/luxury businesses, it can be finicky (I feel like I am always trying to chase the next "deal") and hoping my clients keep buying nice cars. I don't see myself doing this for the next 10 years or go hands off as much as possible.

Greg Dickerson · Answer

@Anson Lau you need to run the numbers and determine what makes the most sense financially. Most times it makes more sense to rent space for your business than own if you have to tie up a bunch of capital.

If you can get in with little to no money out of pocket which can be done through development or even purchasing a value add deal that make make sense.

It’s all about the numbers. Let the math make the decision for you.

Guifre Mora · Answer

@Anson Lau I suggest you look for a SBA loan. Its specially used for what you are wanting to achieve.

Use the SBA loan to purchase your new Commercial Building for your current business which will add value to your RE net worth and pay for its own as you already pay rent (just move your rent payment to a mortgage). You will need 10% down. You can find something that needs upgrading and can add value to the building. Generating added value to your purchase. So basically you are getting rehab funds for the new building from the SBA loan and adding value to your new building. Generating equity. Your don't need to tap into your RE equity this or small % of equity. Use your RE Equity to continue your RE expansion.

Scott Hutter · Answer

@Anson Lau

I think there's positives and negatives to each-

If you buy you benefit from capital appreciation and the ability to further customize the space. If you go that route check out SBA financing- the interest rates are lower and the terms are much longer than a typical commercial loan (5-10 yrs).

If you lease then you have the benefit of having more cash to invest in RE or your business, you can move to where the market is (in case the node for automotive moves), and you can change your space needs if your business gets larger or smaller. Plus you benefit from expensing leasing costs instead of depreciating the real estate. That should allow you to bring home more on an after tax basis.

I'd consider both and determine what has the higher ROI. If that capital that spend buying your business's building only yields you 7% but you could get 12% in RE investing then it's clear you should continue to lease. Or vice versa if your returns are higher from investing in your business. Good luck!