Interest rates are near historic lows. That makes it a good time to consider buying your company’s office or industrial building rather than leasing it.
“Buying commercial real estate is an excellent way for small business owners to create an independent income stream for themselves and accumulate wealth apart from their business operations,” said David Cameron, Head of Business Banking at City National Bank.
Compared with their wage and salary counterparts, business owners are less likely to hold retirement assets, according to the U.S. Small Business Administration. That’s one reason it can be a good idea to own commercial real estate. Many Southern California-based import/export firms find they can diversify their assets by buying office or industrial property, leasing a majority of the space to their own businesses and the remainder to commercial tenants, said John Wheeling, senior vice president and regional manager with City National Bank’s Commercial Banking Division.
Here are five benefits of owning your firm’s commercial real estate:
- When a lease expires after a few years it is typically renewed at a much higher rate, while a mortgage rate is locked in over the life of the loan.
- With interest rates low, a mortgage payment could be comparable to a lease payment — meaning you’re not saving much (if any) money each month by leasing.
- Owner-occupied real estate may appreciate in value and the equity accumulated can become a nest egg.
- Sub-leased space can provide you with a secondary, steady income stream unrelated to core business operations.
- Even if you sell the business or move, you can keep the property and maintain the lease income.
How do you know if you should buy?
Here are three things to consider when comparing buying versus leasing commercial real estate:
How long do you expect to be in the space? If your company is growing fast and will need to leapfrog to larger spaces quickly, a lease gives you more flexibility and is probably more cost-effective. One exception, if you can swing it: Buy a bigger space and grow into it while you lease out the extra space in the meantime.
If you don’t anticipate needing more space and you plan to stay in your building for five to seven years, buying will almost always be less expensive in the long run, Wheeling said.
Do you need cash flow? Buying ties up more of your money, so if you need liquidity a lease might be best.
Your financing options include conventional loans that typically require 25 percent down, and SBA 504 loans that let you buy with 10 percent down and offer below-market interest rates. The lower down payment lets you hold onto more of your capital, but it also means higher costs and fees. Your banker will help you crunch the numbers and review your financing options.
What is the state of your local commercial real estate market? Consult an experienced local commercial real estate broker – they know every square foot of building space within their territories and can advise you on the cost of leasing versus buying.
If you do decide to buy, it’s best to form a real estate holding entity that will own the property. That way if you sell your business, you’ll still own the property. Your banker and attorney can help you decide how to do this.
“Unless there’s a specific reason why you want to lease, you’re almost always better off buying,” said Wheeling.
The foregoing information is provided by City National Bank (CNB). Unless otherwise stated, opinions expressed are those of the respective authors and not necessarily those of CNB. The information is provided without warranty and no recommendation or endorsement by CNB is intended or should be inferred unless specifically stated.
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