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Buying a building for your business: A wise choice?

Buying an office buildingSick of landlords, leases and rent increases? Maybe it's time to make the leap and buy your first commercial location.

But if you want to make the leap to owning the building for your business, make sure you land on solid ground. It's not a step for business rookies.

"In the early stages of the business, consider leasing or renting," says Norman M. Scarborough, professor of small business at Presbyterian College and author of Effective Small Business Management. "You don't want to use valuable working capital in a fixed asset."

Your own building:
the pluses and minuses

There are both advantages and significant drawbacks to buying a business building:

Advantages

  • You have an equity-building asset.

  • You can customize the structure to suit your business.

  • If the real estate market is good, you could make money.

  • No one can raise your rent.

  • Disadvantages

  • Money invested in a building is money not invested in the business.

  • You bear all the expenses of repairs, upkeep and improvements.

  • If the commercial real estate market tanks, you could lose big.

  • It's tougher to move if the neighborhood goes to seed.

  • If anything happens to your business, you're stuck with an empty building.

  • To consider a real estate purchase, you need a track record of success -- several years of demonstrated profit and stability.

    "I'm not a big fan of bricks and mortar for early-stage businesses," says Joan Gillman, executive director of the U.S. Association for Small Business and Entrepreneurship. "Too many young startups, the first thing they want to do is buy a building. They go into their working capital and end up on the wrong side of the ledger sheet."

    If, on the other hand, your small business is established and profitable, becoming your own landlord is worth evaluating. First, you need to attend to the nitty-gritty. Check out your business plan and call your business adviser, if you have one. Is property ownership part of your strategic plan or a step in a whole different direction? If this is not something you had planned to do, does it make sense for your business?

    The taxman cometh -- are you ready?
    Analyze the transaction from a tax standpoint.

    As a renter, you can deduct the entire cost of your rent on your taxes. As an owner, you only get to deduct the interest on your mortgage. But you can also deduct depreciation and any improvements to the building. Which would give you a better deal?

    Some business experts recommend that a business owner purchase the building personally, and lease it back to the business. That way, the business still gets to deduct rent, while the owner gets to deduct interest from the loan from the owner's personal taxes.

    But the situation can get complicated. The rent you receive from your business qualifies as taxable income. Also, would your building be safer from liens or potential lawsuits if you put it in your name or that of your business?

    Talk to your accountant and your lawyer, and investigate all the options.

    Timing is everything
    Check the local real estate market. If space is tight and prices are high, it's not a good time to buy. If real estate is at rock bottom, beware of buying more than you can comfortably sustain.

    Because real estate is a long-term investment, you need to study your area's commercial real estate history. Is its value increasing steadily or in cycles? In short, if you get into this game, what are your odds of winning -- or losing?

    Shop locations and compare the price per square foot until you have a good feel for the market. Talk to a variety of professionals, not just commercial real estate agents. Business owners, bankers, accountants and small-business development centers are good resources.

    Money, money, money
    If you're a well-established business in a region where real estate is steadily increasing -- and there are some good deals to be had -- the first thing you need to do is shop financing. "You don't want to get the perfect property, only to lose it while you're waiting for a loan to clear," says Scarborough. "It's like starting your business. Before you make the actual launch, you want to start tracking down your financing."

    A down payment can run from 10 percent to 25 percent of your loan. If your business buys the property, you may qualify for government low-interest or no-interest small-business loans. Also, if you are locating to specially designated "empowerment zones" or redevelopment districts, you also may qualify for special financing.

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    -- Posted: Aug. 17, 2000

     

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    See Also
    Buying a building, Part 2
    Changes to depreciation rules proposed (8/17/00)
    Lease or buy? How to make the decision (6/5/00)
    Buying and remodeling a building (2/18/00)
    Getting the best deal on a building (12/1/99)

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