To buy or not to buy? That is the question all business owners ask themselves about leasing a building or purchasing commercial property for a business. As with the choice between renting an apartment and buying a house, it’s necessary to understand the pros and cons of each option.
With a thorough understanding of the implications of each, the business owner must analyze how the pros and cons relate to the business’s situation. Apartment dwellers gain no equity but tend to have better cash flow, less unexpected expenses and fewer hassles compared to homeowners.
And moving is far easier and much less expensive. Yet, homeowners gain equity and can profit from home improvements. Many similar pros and cons exist with commercial real estate; however, there is a giant difference in the ROI of a house and commercial property.
Homes appreciate at an average rate of 1 percent to 4 percent, while commercial real estate appreciates at an average rate of 8 percent to 12 percent.
Commercial Property As A Wealth Building Machine
Considering the average appreciation rate of commercial property, it’s easy to see why the appreciation in property value can create wealth for the business owner, sometimes far more than the business itself. Nonetheless, many entrepreneurs miss out on this vital wealth building tool.
Instead, their landlord enjoys a high rate of return and increases the rent at renewal time. Chris Hurn, founder, and CEO of Fountainhead Commercial Capital, advises business owners on how to generate real wealth by ceasing leasing business property and start owning their commercial space.
Hurn offers five key pieces of advice:
- Stop making the landlord rich – Commercial real estate provides tremendous growth; why pay your hard-earned money, so the landlord gets all the benefits? Many entrepreneurs are unaware of the Small Business Administration’s 504 loan program. This program was designed to help small business owners acquire their own commercial property. Qualification is far more likely through the 504 program than with a conventional real estate loan.
- It’s more affordable than most people think – 504 loans can be stretched as long as 25 years. With the competitive interest rates available in 2019, this is a great time to lock in a low rate. Owning the commercial property allows the business owner to control costs because the fixed payment always remains the same. As the principal is paid down and the appreciation adds up, a business owner creates the perfect retirement savings plan.
- The space becomes a business platform – When a business owns its space, it can use it to increase profits and promote the business. Many business owners have extra space that they rent. The business is also free to change the aesthetics, allowing the business to build its brand, enhance customer experience and increase employee engagement.
- Think long term – Business owners should contemplate purchasing their commercial space if the business will remain in that location for the long term. Businesses that are not yet financially stable or may need more or less space in the near future are better of continuing to rent. To help determine if buying is a good investment, Hurn recommends multiplying the cost of the lease and the years the business is expected to operate at that location. This shows the cost of continuing to lease.
- Bet on yourself – Entrepreneurs take risks. You bet on yourself in starting your business; why not bet on yourself by owning the space that houses your enterprise? Though owning commercial property comes with risks, the value of the property can also offset periods of low profitability.
The Disadvantages Of Buying Commercial Space
Hurn shows how businesses benefit from owning their own commercial space; however, there are some drawbacks to commercial real estate if the business is not in the right situation.
- Ownership ties up capital.
- Cash flow may be reduced.
- Growth or contraction of the business may force sale.
- Must shoulder maintenance, taxes and legal expenses.
- Becoming a landlord to other tenants can consume staff time.
Owning a commercial property is a great investment. Small business owners have an alternative to allowing the landlord to get the benefit of the valuable property. The Small Business Administration’s 504 Loan Program allows business owners who wouldn’t qualify for a conventional loan to acquire the property where the business operates.
This gives the business owner control over costs, an additional wealth building machine and the ability to make space an expression of the business’s brand.
Would you like to find the best commercial property for your business? Let the professionals at LCI Realty help you find the right space for your company’s needs. Best commercial property management Phoenix services is a phone call away. Contact our team by dialing 480.531.8919 now.