Why Small Business Owners should own the commercial real estate where their business is ran.
f possible, business owners should always try and own the property they operate on, whether its from initial purchase/business set up, a rent to own agreement, or other contracts. In many cases, after decades of business, the commercial property itself may be more valuable than the small business. This should also be used in conjunction with SEP IRA/SOLO 401k diversification (more on this in another article).
Owning the property where a business operates offers several compelling reasons and benefits for business owners. Below is a concise yet comprehensive breakdown of the key advantages, grounded in practical and financial considerations:
Control Over Space: Owning the property gives business owners full control over the premises, allowing them to customize the space to fit operational needs without landlord restrictions or approvals.
Stability and Predictability: Ownership eliminates the risk of lease terminations, rent increases, or disputes with landlords, providing long-term stability for business operations.
Investment in the Future: Real estate often appreciates over time, making property ownership a potential wealth-building strategy alongside running the business.
Tax Advantages: Property ownership offers tax benefits, such as deductions for mortgage interest, property taxes, and depreciation, which can reduce the business’s overall tax burden. There are also more advanced tax strategies such as 1031 (Like kind exchanges and Cost Segregation Studies) that can be done on the property. Each of these deserve their own post.
Branding and Permanence: Owning a property signals permanence and commitment to customers, enhancing the business’s reputation and brand identity.
Elimination of Rent Uncertainty: Owning removes the unpredictability of rising rental costs, which can strain cash flow, especially in high-demand real estate markets.
Benefits of Owning the Property
Cost Savings Over Time:
While purchasing property involves upfront costs, it can be more cost-effective than paying rent indefinitely. Mortgage payments are often fixed, unlike rent, which may increase annually.
Once the mortgage is paid off, the business eliminates a major recurring expense, improving profitability.
Equity Building:
Each mortgage payment builds equity in the property, creating an asset that can be leveraged for loans or sold for profit in the future.
Property appreciation can provide a significant return on investment if the business owner decides to sell.
Additional Revenue Streams:
If the property is larger than needed, owners can lease unused space to other businesses, generating rental income to offset costs or boost profits.
Owning multiple units or a mixed-use property can diversify income sources.
Flexibility for Expansion or Renovation:
Owners can modify the property (e.g., expanding facilities, upgrading infrastructure) to support business growth without needing landlord permission.
Renovations can be tailored to enhance customer experience or operational efficiency.
Hedge Against Inflation:
Real estate typically appreciates with inflation, protecting the business owner’s investment value.
Fixed-rate mortgages shield owners from rising costs, unlike rent, which often tracks inflation.
Improved Financing Opportunities:
Owning property provides collateral that can be used to secure loans or lines of credit for business expansion, equipment purchases, or other investments.
Lenders often view property-owning businesses as lower-risk, potentially leading to better loan terms.
Long-Term Wealth Creation:
Property ownership can serve as a retirement plan or legacy asset, providing financial security beyond the business’s operational life.
The property can be passed down to heirs or sold to fund retirement.
Considerations when/if purchasing:
Location Matters: Properties in prime locations may have higher upfront costs but offer greater appreciation and customer foot traffic, amplifying benefits.
Financial Readiness: Ownership requires significant capital for down payments, maintenance, and taxes, so businesses must have stable cash flow to manage these costs.
Market Research: Business owners should analyze local real estate trends to ensure the property is a sound investment and aligns with business goals.
Owning the property where a business operates provides control, financial stability, and long-term wealth-building opportunities. It eliminates rent-related uncertainties, offers tax advantages, and allows for customization and expansion tailored to the business’s needs. While the initial investment can be substantial, the benefits of equity growth, potential rental income, and inflation protection make property ownership a strategic move for many business owners. For those considering this step, consulting with financial and real estate advisors is crucial to align the decision with the business’s financial health and market conditions.
