Regardless of the economic climate, arguments can always be made for why small business owners should purchase their commercial properties. With a steadily growing economy and still historically low interest rates, reasons to buy rather than rent are incredibly compelling right now. I have worked with entrepreneurs and the U.S. Small Business Administration for more than 20 years, helping business owners grow their wealth through the purchase of commercial real estate. I have weathered rising and falling interest rates, seen banks pull capital from the markets and trudged through the Great Recession. The past few years have been good to many business owners, but the overall market for commercial real estate acquisition today is as solid as I can remember.
Here are a few reasons entrepreneurs should consider buying their buildings:
1. You can diversify your retirement portfolio with real estate.
With the rise in the stock market, many investors already need to reallocate their retirement savings, and diversifying into real estate can be a smart play. Purchasing a commercial building that can house your business might be a good match. And while you may still be bullish on the stock market, the only thing we can truly predict about the market is that it will fluctuate. Self-directed individual retirement account (IRA) funds also can be used to purchase commercial real estate, and it is traditionally a solid long-term investment strategy.
2. You won’t have to pay rent (to others).
Ask any small business owner about the biggest costs of doing business, and most will tell you that it is salaries followed by rent. Yes, inventory and production costs might be more significant, but rent is always a big one. What if you could stop paying rent and start paying yourself? By purchasing your commercial property, instead of making your landlord rich, you can build your wealth — and maybe even lower your overall facility costs.
3. You have the opportunity to become a landlord.
One of the most popular U.S. Small Business Administration loan programs is set up specifically for owner-occupied real estate, but when you read the fine print, the owner only needs to occupy 51% of a building. It’s possible to buy your building, occupy a little more than half of it for your business and then rent out the other 49%. By becoming a landlord, a small business owner can generate income to offset a portion of the overall loan cost. At the same time, if your business expands, you can move into the “extra” space.
4. You may be able to rent your building to your successor.
If you own your building, then you are growing your wealth over time, but there’s a hidden benefit that comes into play when the time comes to sell your business or pass-it-on to a successor. When the time to sell your business arrives, you need not sell the real estate that houses it. Instead, you can sell the business and then rent the building back to the new owner of your former company. This creates a revenue source for perhaps years to come, while the property may continue to appreciate.
5. There are options for many types of businesses.
Almost any type of business can own its commercial real estate. Sometimes we think the option is just for larger businesses or companies in a specific segment, but nearly any business can benefit from owning commercial real estate. For example, many different types of office condo and warehouse condo products are on the market and offer great opportunities for business owners to own their space. Many office parks throughout the United States are populated with corporate condos, even among high-rise buildings.
6. Rates are currently low.
Rates for commercial real estate loans are, in some cases, at all-time lows. For example, rates for the SBA 504 Loan Program for owner-occupied real estate fell to an all-time low in the month of June. The rates in June were the lowest in the 33-year history of the loan program. In general, interest rates have been favorable for commercial real estate, but just like the stock market, we know the only guarantee is that they will fluctuate. If you have thought about purchasing a building, consider taking the time to crunch the numbers and see if this is an option.
Owning Is Not For Everyone
While I’m a huge advocate for entrepreneurs to own their commercial real estate, there are situations where it makes sense to continue to rent. If your company’s location is central to your business model and can’t be changed, then you may not be in a position to buy a building. If the current landlord won’t sell and you can’t move, then you have few options but to continue renting. If you don’t foresee your business growing, then you also have fewer options. If you don’t plan to stay in your location for a few years, then it may make sense to continue renting because costs associated with purchasing commercial real estate may not be recouped in less than two or three years.
While I can make the case that entrepreneurs should consider owning their commercial property, today’s economic climate makes it even more attractive. As a wealth creation strategy, it might be tough to beat for a long time.