Businesses have struggled for decades with the decision whether to own or lease their facilities. The question can become overly complicated as objective (financial, space needs, etc.) and subjective factors (business image, growth plans, pride of ownership, etc.) combine. Forces outside of the business owner’s control, such as the general economy, interest rates, loan options and future real estate values further obscure the issue.
By Jeff Rauth. Email Here or 248 885-8797. SBA Loan Officer at a Bank That Lends Nationally. 15 Years Commercial Real Estate Experience. Past Commercial Mortgage Broker.
For many business owners the question boils down to money. First of all, does the business owner have the capital needed for the down payment and still have enough left over to properly run the business? (Many entrepreneurs are surprised to learn that they are now able to come in with only 10% down on almost all building purchases).
If they do have the required capital, the question then becomes should they use this money as the down payment to buy the property, or should they use the cash in some other investment? When all factors (tax rate, tax benefits, interest rate, inflation, depreciation, expected holding period, etc.) are considered, which will have the greater return?
Some of the major pros and cons of ownership include:
- Monthly mortgage payment is usually lower than comparable lease payment
- Potential future rental income
- Assisting owners with wealth/retirement
- Building an asset that will assist in securing business lines of credit and other forms of loans
- Pride of ownership
- Stability – control
- Creation of equity
- Business image
- Not being exposed to increases in rental market
- Not being exposed to whims of landlords
- Dramatic tax benefits
- Property management responsibilities
- Interest rate exposure on adjustable mortgages and/or if mortgage balloons
- Opportunity costs of down payment not being in a more liquid asset, or being used for business operations
- Decrease in functionality of building
- Building value subject to market conditions
- Length of time in selling building
- Decrease in space flexibility
Argument For Owning
Now is one of the best times to purchase commercial real estate since the Great Depression. Property values have dipped between 20 – 40% nationwide and 90% financing is widely available for owner occupants. Rates are hovering near all time lows. Many of our clients are buying properties at 30 to 40% of what the original cost to build was…
Keep in mind that purchase financing is easier to secure compared to refinances, lines of credit, etc (less issues with value). Borrowers that want to purchase a building that they currently rent, are in even better positions.
If you have 10% for a down payment and your business is making a profit you are likely in the position to own your building. See SBA programs to learn how you can qualify for 90% financing.