Recently I was working with a business owner who had closed down their business and was listing their property for sale. The sale of the property would result in significant cash for the business owner in their retirement stage. Compare this to many business owners who don’t own their property and are ready to retire. Unfortunately for them, unless the business is valuable and many times it isn’t, all they are left with is what they have put away each year from the profits the business has made. We are told at a young age that we should be buying our house instead of renting, however we often fail to put the same logic to use when we operate our businesses. Here are 8 reasons why you should invest in a building instead of renting or leasing when possible.
Equity: When you lease or rent a space for your business you are building the landlord's equity in the property you occupy as you make your monthly payments which go towards paying their mortgage. Ownership of a building means that the payments you would make towards rent are now paying down your own mortgage and building your equity in the building you occupy.
Control: Owning your own property enables you to control what happens to the building, what upgrades should be made and when. Your investment into leasehold improvements becomes investments into your property. Additionally, when you own your own property you don’t have to worry about lease increases, or being evicted because of course you are the landlord. You control the decisions about costs, space allocation and payments.
Cash Flow: Owning your own location enables you the opportunity to sublet portions of your building and have cash flow from sources outside of your regular business stream. This cash flow goes towards your mortgage and reduces your cost of ownership and your land tax burden while increasing your equity.
Diversification of your business portfolio: As business owners we own the assets of our business. Owning the building diversifies the risk of business ownership because now we own land and a building that still has value in the case that a strong competitor was to take some of our customers away from us and diminish the value of our business.
Tax benefits: Owning a business property can reduce your taxes. Not only is interest treated as an expense, but also there are costs and depreciation that can be written off and potentially save you income tax and put money in your pocket.
Appreciation of the property value: If we are planning on operating a business for a decade or more there is a good chance that if we own the property there will be significant appreciation in the value of the property we occupy. Owning the property ensures that we benefit from the valuation increase and not our landlord.
Leverage and financing: Your investment in your property could ensure that you have cash when you need it. Banks are more likely to take your business seriously and lend you money easier if you own the property. Additionally owner occupied properties often need less down payment when purchasing, thus increasing your leverage. Finally when we talk about leverage, having equity in a property enables you to borrow on that property equity and invest in other real estate.
Retirement Options: If your business isn’t worth much when you head into retirement, there is a good chance that your building will be. Owning the building gives you at least two options. Firstly you can sell the building and use the money to fund your retirement or if you prefer you could lease out the building and give yourself a cash flow similar to the retirement fund that government employees are entitled to. It's your choice, but luckily you have that choice.
There are times when it is impossible to own the property your business occupies. This shouldn’t stop you from investing in commercial property that another business can pay down through their rent or lease. Smart business owners see the value of owning commercial property as a safety net in the case that their business fails and to ensure a prosperous future.
Dave Fuller, MBA, is a Business and Commercial Realtor. Dave is the author of the book Profit Yourself Healthy. Email your commercial business questions to dave@businessrealtor.ca.
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