One of the best strategies to build equity and wealth for your business is by investing in real estate. This strategy has several short-term and long-term benefits that can make a significant difference to the long-term value of your company.

First consider the basic principle that paying rent on your space puts you at a disadvantage. Consider the following:

  1. Rents will increase over time.
  2. You have limited control over improvements that can be made to your space.
  3. If your landlord decides to sell the building or not renew the lease you can face costly moving expenses.
  4. Although your rental expenses can be deducted from your taxable income, you are not paying down an asset.
  5. Although your rental expenses can be deducted from your taxable income you are not paying down an asset. Imagine the 5 or 10 years of monthly rental costs that can be used instead to pay down principle on a business asset

Owning your location gives you some compelling benefits:

  1. There are tax advantages. You are able depreciate the property, expense the mortgage interest and costs to maintain the property, etc. The depreciation expense is in effect a non-cash expense by which you are reducing your taxable income without a cash outlay.
  2. You control your own property. Although property taxes can increase, you are not at the mercy of a landlord or increased rent situation.
  3. Your property can appreciate over time. This equity is unlocked once you sell, but with a long timeline the price of real estate increases regardless of short-term fluctuations in the economy.
  4. You have flexibility in making improvements to the property to reduce your overhead. Installing energy efficient lighting or solar panels can reduce your monthly utility expenses. If you have extra land on your property and your business is growing a building addition can help in expanding your company and the value of your location.

Currently, mortgage rates are still historically low.  Business owners with a 10 year or more investment strategy can leverage the current low cost of funds to accumulate a strong long-term asset.

Here are three scenarios that highlight different outcomes our clients have experienced.

  1. One of our clients bought 10 acres of land 15 years ago to operate a recycling/waste company on the outskirts of town. They recently sold that land to a developer as the town they were in had expanded significantly and property valuations had increased substantially over time. Their initial $250,000 investment yielded over $2 million on the sale and they simply reinvested a portion of that gain into another property further outside the city limits to continue operating their business. In addition, a properly structured 1031 exchange allowed the business owners to defer their taxable gain by rolling that gain into a new purchase.
  2. Another client owns their commercial property in a separate holding company owned by him and his wife. They use this holding company to rent the space back to the operating company they own which gives them flexibility in expensing income on their taxes. A creative accountant helps them find ways to reduce their taxable income personally as long term rental income is taxed differently than personal income.
  3. We also have a client in manufacturing that acquired a significant space years ago. Since their company only uses a portion of the space they are able to subdivide their location and rent the other portion to a different business owner. They are securing rental income and using that to pay a portion of their building’s mortgage and in essence, someone else is helping them pay down the principle on their mortgage.

If you are currently renting your space, it’s worth taking this all into consideration and talking with your business advisor(s) regarding if now is a good time to look into property ownership.

One of the best strategies to build equity and wealth for your business is by investing in real estate. This strategy has several short-term and long-term benefits that can make a significant difference to the long-term value of your company.

First consider the basic principle that paying rent on your space puts you at a disadvantage. Consider the following:

  1. Rents will increase over time.
  2. You have limited control over improvements that can be made to your space.
  3. If your landlord decides to sell the building or not renew the lease you can face costly moving expenses.
  4. Although your rental expenses can be deducted from your taxable income, you are not paying down an asset.
  5. Although your rental expenses can be deducted from your taxable income you are not paying down an asset. Imagine the 5 or 10 years of monthly rental costs that can be used instead to pay down principle on a business asset

Owning your location gives you some compelling benefits:

  1. There are tax advantages. You are able depreciate the property, expense the mortgage interest and costs to maintain the property, etc. The depreciation expense is in effect a non-cash expense by which you are reducing your taxable income without a cash outlay.
  2. You control your own property. Although property taxes can increase, you are not at the mercy of a landlord or increased rent situation.
  3. Your property can appreciate over time. This equity is unlocked once you sell, but with a long timeline the price of real estate increases regardless of short-term fluctuations in the economy.
  4. You have flexibility in making improvements to the property to reduce your overhead. Installing energy efficient lighting or solar panels can reduce your monthly utility expenses. If you have extra land on your property and your business is growing a building addition can help in expanding your company and the value of your location.

Currently, mortgage rates are still historically low.  Business owners with a 10 year or more investment strategy can leverage the current low cost of funds to accumulate a strong long-term asset.

Here are three scenarios that highlight different outcomes our clients have experienced.

  1. One of our clients bought 10 acres of land 15 years ago to operate a recycling/waste company on the outskirts of town. They recently sold that land to a developer as the town they were in had expanded significantly and property valuations had increased substantially over time. Their initial $250,000 investment yielded over $2 million on the sale and they simply reinvested a portion of that gain into another property further outside the city limits to continue operating their business. In addition, a properly structured 1031 exchange allowed the business owners to defer their taxable gain by rolling that gain into a new purchase.
  2. Another client owns their commercial property in a separate holding company owned by him and his wife. They use this holding company to rent the space back to the operating company they own which gives them flexibility in expensing income on their taxes. A creative accountant helps them find ways to reduce their taxable income personally as long term rental income is taxed differently than personal income.
  3. We also have a client in manufacturing that acquired a significant space years ago. Since their company only uses a portion of the space they are able to subdivide their location and rent the other portion to a different business owner. They are securing rental income and using that to pay a portion of their building’s mortgage and in essence, someone else is helping them pay down the principle on their mortgage.

If you are currently renting your space, it’s worth taking this all into consideration and talking with your business advisor(s) regarding if now is a good time to look into property ownership.