Buying a building for your business:
A wise choice?
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:
You have an equity-building asset.
You can customize the structure to suit your
If the real estate market is good, you could
No one can raise your rent.
Money invested in a building is money not
invested in the business.
You bear all the expenses of repairs, upkeep
If the commercial real estate market tanks,
you could lose big.
It's tougher to move if the neighborhood goes
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
"I'm not a big fan of bricks and mortar for
early-stage businesses," says Joan Gillman, executive director of
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
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
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
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
-- Posted: Aug. 17, 2000