Should a Business Buy Its Own Building?

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New Office

I’ve been looking to buy an office building for about five years.

I’ve had the opportunity to watch many small businesses in town, from eating establishments to doctor’s offices. And the ones I have seen get into financial trouble have often been renting and had the rent raised on them suddenly or unexpectedly. Owning your own building doesn’t necessarily mean you will make money on the investment, but it does mean that your landlord won’t raise the rent at an inopportune time.

We finally found a great building and decided to purchase it!

We’ve moved!

Our new offices are just a few blocks from our former Boar’s Head location. And they have the room we need to grow.

Here are some of the advantages and signs it is the right time for a small business owner to own rather than rent:

  1. You can pick a permanent location.
  2. You won’t have to move unless you want to.
  3. When your clients associate you with a location you can keep the location.
  4. You can install anything you think is helpful.
  5. You can decide what maintenance is important and when it is important.
  6. You can set your own temperature controls.
  7. You can finish the interior exactly the way you want.
  8. Some expenses are only justified when you know you have a long-term lease.
  9. You get stable rent.
  10. Your business can pay rent which is a business expense.
  11. You can own the building in an LLC providing limited liability and separate tax accounting.
  12. Your LLC can depreciate the building which gives you a tax advantage to offset the rental income.
  13. If you hold the building until your heirs inherit it, they will get a step up in cost basis erasing the depreciation.
  14. Any interest payment is a deductible expense to the entity owning the building.
  15. You can sell the building and reinvest in property without paying capital gains through a 1031 exchange.
  16. Owning real estate allows you to profit in any combination of cash flow, appreciation, and reduction of debt.
  17. You can get a relatively long term commercial lease at a reasonable rate.
  18. You may qualify for a Small Business Assistance 504 Loan with less down payment and a longer term.
  19. Office buildings are relatively inexpensive right now, making it a good time to buy.
  20. There are a number of empty office buildings, making it a good time to buy.
  21. A mortgage at today’s rates is the best hedge against inflation.
  22. Rents are relatively low now and will rise as interest rates rise.
  23. The rental income offers a diversification to your business.
  24. Even if you decide to sell or move your business you can keep the rental income.
  25. You are not thinking of retiring in the near future.
  26. You are not thinking of selling the business in the near future.
  27. You can carefully select any other tenants to enhance the neighborhood of your business.
  28. You now have an appreciating assets for a fraction of the down payment leveraging your investment.
  29. You have sufficient assets or cash flow to make leveraging your investments a risk you can afford.

The reasons for a small business not to own their own building are more limited:

  1. You don’t have the cash flow or capital to purchase the building.
  2. You are expanding and will need a different building in the future.
  3. You need the money it would take to purchase the property for living expenses.
  4. You are thinking of retiring soon.
  5. You do not want to leverage your investments by adding a mortgage to the mix.
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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)