Buying a Building to House Your Business? Stop and Consider This First.

by | BiggerPockets.com

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.

Stability

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.

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Growth

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!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

9 Comments

  1. Jason Reinke on

    One of the pros you did not mention is stability. Not the cash stability which you talked about, but the location stability. The more public, retail oriented your business is the more disruptive moving it will be. Nothing worse than losing customers because they cannot find you!

    • Dave Van Horn

      Great point Jason. I agree. That’s definitely an important consideration. Business stability based on location can go either way (not every location is stable forever). When starting a business in a new location it may make more sense to lease at first. Thanks for sharing!

  2. I would. Only because I am a Child Care Provider and in business for 13 yrs. I would love to own a commercial building and keep a section of the property for a Daycare Business. I know how to run this business. I would not suggest for beginner in childcare business to start. It will take longer than a year.

    • Dave Van Horn

      Hi Cee,
      Congrats on being in business for 13 years! I agree with you that it’s best to get one’s business off the ground first before thinking about buying a building for it.
      Best of luck finding a commercial space.
      Dave

  3. Shiloh Lundahl

    Great article! I was in this exact position in 2014. The building that I have my therapy practice in went up for sale. I thought that if someone bought it then they could kick us out when our lease was over. Or they could move someone in next door that would be disruptive to the therapy environment.

    So I worked out a deal with the sellers and I purchased the property. The transition was hard for some people but, overall, it has worked out great and now I own a building that will be paid off by my tenants over the next 20 years.

  4. Richard Jenkins

    Great article Dave. I am currently starting a new business and have found a retail location for sale. The asking price is much high than what is supported by the comps. and what the building leases for. After figuring all my numbers I have determined that the building is worth about 40% of the asking price. This is supported by the purchase price per square foot of recently sold properties and if my new business fails and I need to lease out the building, I could get a good return. I want to write an offer for about 10% more than the price I determined it’s worth. My real estate agent feels that the building offers more value to me because I will be occupying it and that I should offer more, about 75% of the asking price. By offering more on the purchase price and if I had to lease it out, the numbers would not make sense to keep the building as I would be in the negative. I plan on staying in the building for a very long time, I don’t see the business outgrowing the building, and I will be paying cash. Any thoughts? Thank you.

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