What Entrepreneurs Should Know Before Making The Leap From Renting To Owning
Like many others, I have watched WeWork’s fall from grace with interest. In recent months, the shared workspace company’s valuation has plummeted, and its future remains in doubt. But as an advocate for small-business owners who want to buy their properties instead of renting, I find the specific details of the WeWork saga to be less interesting than exploring the lessons that can be learned in regard to renting business space.
Here are a few key things entrepreneurs should know before making the leap from renting to owning:
The age of your business plays an important factor.
Not every small-business owner can purchase their commercial real estate, but many can and do. I have financed franchise restaurants and hotels, manufacturers, retailers, doctor’s offices, breweries, dance studios, and the list goes on. In all of these cases, the businesses started out renting from someone else. They dutifully made monthly rent payments, and in most cases, they were happy to do so. This is because renting during the startup phase typically makes great economic sense. However, as time rolls on, it becomes clear that while renting might be making their landlord rich, the business owner has little to say for the ongoing “investment” into the workplace via rent.
While it might be a big stretch for startups to purchase their commercial property, more mature businesses typically have the means to make the leap and buy their building and underlying real estate. Once you own your property, you can then begin making monthly rent payments to yourself, via a holding company, and become the landlord.
With ownership, you can create an appreciating asset with tax benefits.
Ownership has many benefits. First, as the owner of your building, you receive monthly rent payments that can be applied toward the small-business loan you used to buy the property. The rent payments are typically tax-deductible for your business, and the asset you own through your holding company has the potential to appreciate in value as commercial real estate traditionally has. At the same time, you may be able to claim depreciation on your tax returns for equipment and other assets within your business. In addition, the building can be an incredible tool in your financial life, as it can be leveraged or used as collateral for other business purposes.
Lastly, the commercial property may outlive your business, or at least your interest in it. In the future, you may sell your business and then rent the location back to the new owner; or, you may choose to be a landlord for a completely different tenant. Your asset, which is helping you save money on rent, could be a source of tax relief now and income far into the future.
Interest rates and the economy are currently favorable for ownership.
The U.S. economy could hardly be better for small-business owners who want to purchase a commercial building. Interest rates remain low, and the rates for some U.S. Small Business Administration (SBA) loans hit historic lows during the past 12 months. At the same time, the stock markets continue to rise, and many American small-business owners have grown their investments and retirement savings. Purchasing a building now makes sense, because it can be acquired at low interest rates and with down payments realized from stock market gains.
Some entrepreneurs can even use funds from their individual retirement account to put money down on commercial property. Buying real estate with retirement savings also helps balance a portfolio that might be heavily weighted in stocks and other traditional investments. While rates will always fluctuate, I have never seen a time where savings rates and stock prices were high and interest rates were this low. It’s a combination that favors small-business owners.
Owning can help you control costs.
I recently met a successful executive who operated several ice cream shop franchise locations in large, suburban malls. When the time came for him to renew his lease in one busy mall, the landlord wanted to double his rent. To keep the business open, he would need to sell thousands of dollars more per month — that’s a lot of ice cream cones. He did the math and realized that the sales required just to break even were unrealistic. He closed a successful business and moved on.
While owning your location in a mall might not be possible, had the entrepreneur owned his shop, his costs would be set and stable, but more importantly, he would control his own destiny. Too often, small-business owners are at the mercy of their landlord and the marketplace regarding one of their most significant monthly costs. If you own a company and worry that a rent increase might knock you out of business, consider all opportunities to buy your commercial space.
Some businesses are better off renting.
While I advocate for small-business owners to purchase their properties, not every business is a candidate. For example, it may be difficult to find a retail location that can be purchased, or if you have an established business that depends on its location, then it might be better to continue renting. If you don’t have a long-term plan for your business, it may also make sense to rent.
Owning their own space is an attainable goal for many small-business owners. For entrepreneurs looking to do so, loans for owner-occupied real estate provide a good way to control costs and build their personal wealth, while essentially paying rent to themselves.