Q. I have a small business that is wildly successful in this dismal economy. I’d tell you what it is, but I don’t want any competition. I’m renting space right now, and my lease is up for renewal in two months. There sure seems like a lot of office space for sale, and I’m wondering whether I should be buying instead of renting. Do you think it makes sense to pay myself rent and then own a building to rent to another business when I retire in 20 years as part of my retirement plan, or am I better off renewing my lease?
Congratulations on your success even though you’re not willing to share your business model with us. Owning your own office building can be beneficial, but not always. I’ll cover some things you should consider, but I recommend you discuss this issue with a tax professional before either buying a building or renewing your lease.
Your business is successful now, and you know your current occupancy needs, but that could change in the future. You could buy a building and spend money on the upfit only to find that your continued success requires a much larger space. Now, you are in a position where you need to spend money to purchase or lease a larger space while trying to sell or lease your existing building. Alternatively, the demand for your services could decrease, leaving you with space you don’t need. Commercial properties don’t turn over quickly; it could take awhile either to sell a building you no longer need or to find a qualified tenant. If you have not been in business for long and/or don’t have a good sense of how stable the occupancy needs of your business are, you’re probably better off leasing unless your budget can handle a prolonged vacancy.
As a small business owner, to qualify for a loan to buy the building, more than likely you will be required to personally guarantee the loan. The lender will review the strength of your business as well as your personal net worth. Lenders want to protect themselves and know that you are serious about your business and repaying the loan. Unforeseen events may occur, making it impossible to repay the loan from your business income. If you are then unable to make the payments personally, the lender has the ability to seize personal assets to satisfy the outstanding loan balance.
When financing, you will need a down payment of 10 percent to 20 percent of the purchase price. You’ll also need to be prepared for the costs of any possible repairs, upfits, building and parking lot maintenance, landscaping, association dues, janitorial services, utilities, taxes, insurance, etc. You also have the opportunity cost of the down payment: That money could be doing something else for you or your business.
If you think that over the next 10 years your business will remain strong, and staffing and space needs will remain the same, buying your own office space may be a very good financial decision. Interest rates are low, and there are some great deals on office condominiums and stand-alone buildings. A 10-year net worth projection based on continuing to rent office space compared to one based on buying would be very helpful to you when making this decision. An experienced financial or tax professional can assist you with this comparison.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 99466, Raleigh, NC 27624