As a business owner, have you ever thought about whether you should own or rent your company building? It’s likely you have since it’s one of the top most-Googled financial questions in the U.S.
Every business has a big dream for their business and wants to make it happen. But, along the way many business owners question the money they’re paying in rent for their company building. Further, the combination of increases in rental rates coupled with lower-than-normal commercial mortgage rates (until recently) have caused many CEOs to ponder this question.
Early in my career, I had a CPA tell me that paying rent is for people who can’t afford to own. However, many business owners simply choose to employ their capital into operating their business and choose not to invest in real estate because they don’t want to be in the real estate business. So, the question is more complicated than it appears.
I have one client who already owns a building and is expanding it because the business is expanding. Even though constructions costs are sky high, he sees this investment as a no-brainer. Simply, the profit from the business expansion will more than pay for the cost of the construction.
I have another client that is renting. But recently, his landlord has taken away a third of his space and now has told him that he won’t renew their lease at all. This client runs a business that has special ceiling requirements and special electrical requirements. Trying to find an existing building near his current location that meets their needs is like trying to find a unicorn. He did find some land which needs to be rezoned and then he will begin construction. Again, the cost of construction is high. But this owner sees owning the building as a necessity because he can’t find one to lease. He’s also had the experience of a landlord not renewing his lease. So, he understands that renting does not allow him to control his destiny.
Recently, I’ve found that cost of the rent is about equal or more than the cost of the mortgage payments. But the problem is a down payment, which is typically 20-25% of the cost of a building. An option for owners who will occupy the building is the SBA 504 which only requires a 10% down payment (much more manageable).
Likely, this hits the most-Googled topics because business owners want to answer the following questions:
- Can I afford to buy? (Meaning I have the down payment.)
- Do I want to be in the real estate business? (Real estate comes with market risk and leasing risk.)
- Do I want to control my own destiny? (Meaning if my landlord doesn’t renew, do I have a place to go?)
Taking these questions into consideration will help you decide which is best for you and your business.