After paying rent for several years, many business owners are not thrilled about helping their landlord build equity in the building and ultimately they regret not purchasing the property from the outset.
The principals at Beckner & Associates, a real estate firm in Lenexa, Kansas believe most businesses should own their own property. The hard questions are when and how. This is why it’s critical for small-business owners to consider the advantages of owning their property as well as understand the issues accompanying purchase.
Tax deductions such as mortgage interest, property taxes and depreciation can help a small-business reduce the blow to the expenditures when owning a property themselves. By owning the property:
- The business pays market rents and can move money to the owner which reduces the tax obligation.
- Company owners are now landlords allowing the stabilization of lease rates for as long as they like to avoid paying rate increases.
- The building can be owned by a limited liability company to provide additional tax benefits not found in corporate ownership.
In sum, company owners benefit from control of rental rates and real estate investors can make money by cash-flow appreciation and reduction of debt. Property ownership offers other advantages, too, such as control of operating expenses and careful management of maintenance issues.
As for most things in life, one size doesn’t fit all such as the relationship with small-business owners and purchasing property. Here are some considerations to think about to why property ownership may not work for a small-business:
- Significant funds that would be available to fund business growth may have to be utilized for a required down payment to buy a property (typically 10-20 percent down payment).
- A small-business anticipating significant growth can outgrow a building in a small amount of time and should postpone purchasing until growth has stabilized. Or, they can buy a larger building and lease part of it to other companies.
We’ve only touched the surface. As you can see, the decision to buy rather than lease a property is not as clear-cut as many business owners might think. Why risk making a bad decision? Give us a call or e-mail a WFY adviser at firstname.lastname@example.org to point out both advantages and disadvantages that weigh into this important business decision.
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