Next time you're writing a check for the rent, ask yourself
"Would I be better off owning my business location?" With
interest rates at near historic lows, the answer for a sizable
number of entrepreneurs is: probably so. "If you have the
opportunity to either rent or buy, absolutely buy," says Scott
Crossman, president of Orlando, Florida, commercial real estate
brokerage Crossman & Co. "This is a great time in the
market when you can borrow money on very aggressive terms. In the
majority of instances, that makes great sense."
Owning does offer many benefits. With each mortgage payment,
you'll build equity in the property instead of just lining the
landlord's pockets. That equity may be enhanced if the property
value appreciates. And as the landlord, you control the space,
deciding everything from what color to paint the building to which
tenants-if any-to lease unused space to. You also control costs,
since you can decide on financing and maintenance and upgrade
schedules. And you won't be subject to rent hikes.
Buying a commercial property generally requires a cash down
payment of 20 percent of the value. If your property has other
tenants, you'll need signed leases to show your lender.
You'll also have to arrange for the property to be insured
against damage or loss. Terms of the loan will normally be 15
years, with the interest rate pegged to a benchmark, such as the
rate being paid by U.S. Treasury securities. Buying commercial
property is a serious commitment that typically costs a lot of
money, so you'll want expert legal, financial and real estate
advice at every step.
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Before making the decision to buy, consider several factors. The
first is your cash situation. If making the down payment consumes
cash needed to expand your young business, buying now may be
unwise. Also consider that you'll need reserve funds or credit
for unexpected repairs. These can be large expenses in the case of
air conditioning systems, roofs, foundations, etc.
Carefully examine the tax consequences of becoming a landlord.
Most are positive. Owners are typically able to deduct a portion of
the value of the building and improvements each year as
depreciation, a noncash expense that can reduce taxes on business
profits. If the entrepreneur purchases the property in his or her
own name, the business can pay rent to the owner, which generates
income to the entrepreneur without incurring double taxation.
"Another thing to look at is your business's
future," says Bert Mathews, president of The Mathews Company,
a Nashville, Tennessee, commercial real estate company. "How
much space are you going to need 10 years from now? If your
business is growing quickly, owning your own space is probably not
that good an idea if you're going to buy a building and occupy
it all by yourself." Having tenants, he adds, will give you
more flexibility, as you may be able to take over their areas as
needed.
Finally, consider your exit strategy. Try to pick a building
that fits with the rest of the properties in your area, so when the
time comes to move, you'll have less trouble selling. Remember
that real estate is naturally illiquid. It can take months or years
to sell a property, especially if prices have declined. "If
your business strategy calls for you to someday be on the other
side of town, it can slow you down," Mathews says.
If you purchase, you need to figure out how much you'll pay
on the mortgage vs. how much you'll pay in rent, as well as the
effects of appreciation, amortization, taxes and repairs. Coming up
with a positive figure when you calculate the rate of return is no
guarantee you'll like being a landlord instead of a tenant. But
it can be a good way to lock up a desirable location, avoid future
rent hikes and get a good grip on controlling your own future-all
while making a potentially profitable investment.
Mark Henricks writes about business and technology for
leading publications and is the author of Not Just a Living.