Should You Buy Your Business Location?
from daveramsey.com on 04 May 2011
To lease or to buy? Many business owners wrestle with that decision every day. How do you know when it’s the right time?
The right time is different for every business, but the wrong time holds true for everyone. If you have to go into debt to buy your space, it’s the wrong time. Never buy commercial real estate with borrowed money.
Commercial real estate is expensive—often valued in the millions of dollars. So most business owners believe you have to borrow money to buy some. Not true! Dave leased his building for several years until he saved enough money to buy it with cash. And we’re talking about a multi-million-dollar purchase.
Never tie your business down with debt, because even in business, the borrower is slave to the lender. Inevitably, when you’re hundreds of thousands of dollars in debt, something will happen. You’ll lose a big client or the economy with shift on you. You’ll be blindsided and lose everything you own.
Instead, put your business on solid ground, slowly and steadily. Lease your space and use your money to reinvest in your business. Make it grow. Once your business is really rocking, you can consider getting into the real estate business.
Consider the Pros and Cons
Once you’ve got enough cash built up to start thinking about buying your own building, you need to decide if it’s a wise move for your business. The answers vary based on your needs, so try weighing the pros and cons of each scenario. Here’s what you need to think through.
- Flexibility to change locations without having to sell the property
- Rent is a tax-deductible business expense
- No risk of owning property in a bad market
- Rental rates are subject to annual increases
- No equity buildup
- Could be forced to move at the end of the lease
- Freedom to make changes to suit your business
- Annual depreciation is tax-deductible
- No rent increases
- Can sell the property for a profit in a good market
- Can lease out any available extra space for a profit
- Keep the location as long as you want
- Opens you up to legal risks not associated with leasing
- Responsible for repairs and maintenance, which can increase operating costs and take time away from running your business
Get The Right Help
The list of Buying Pros is longer, but don’t assume that’s the way to go. You have to make your decisions based on the benefits for your business and the market conditions.
A commercial real estate professional can help you make your decision by conducting a “lease versus own” analysis. Dave’s Endorsed Local Providers (ELPs) are commercial real estate experts in your area. Your ELP will help you determine the right choice for you and then help you find a great deal on your next space—to lease or purchase. Contact your ELP today.