How to Determine Whether to Rent or Buy Your Place of Business


By Mike “Sparky ” Detmer July 9,2014


My friend Mike called from his truck in route to look at a piece of commercial property on the edge of town. Like many of you, he owns a residential systems integration company that is growing, and he is planning future expansion.

Mike Detmer is the vice president of sales and marketing at Russound. He can be reached at mdetmer@russound.com.

“It’s a bit of a stretch,” Mike told me. “But there’s a good chance I can rent the back building to another tradesman which will offset the mortgage payment to below my current rent,” he said reassuringly. Mike started looking to become a property owner after projecting his business’ P&L over a time horizon of five years or so. The exercise convinced him that the right move now could pay off big in the future.

You, too, may come to the same conclusion when you plan how to handle one of your biggest expenses: the rent you pay now and in the future. Whether you intend to keep your company’s size the same or to expand it, controlling overhead costs is a key to its security. When you look closely, rent costs may be greater than you think. I remember a conversation with Paul Starkey of Vital Management who told me that rent costs can account for a significant portion of fixed overhead for smaller integrators. I suspect that’s one reason why Richard Glikes of Azione Unlimited counsels his group members to consider owning their own facilities.

I can’t give you tax or legal advice, but I urge you to seek it when considering whether to rent or own your place of business and in the process, you may want to consider the following:

There may be strategic and tax advantages of real property ownership that help your bottom line.
1
Foreclosure auctions are on the rise, which could be your opportunity to snag the bargain of a lifetime. While foreclosure rates may be decreasing, lenders are eager to move previously foreclosed properties off their books. This is driving auction activity up and keeping the prices properties sell for discounted below market value. Check with your realtor about commercial property auctions. You might find a deal that you can’t resist.

2 Interest rates remain at historic lows, so lock them in while you can. Low rates bode well for residential systems installers who can secure financing at low rates, which in turn keeps their payments low. Run the numbers for your business. You may find that the monthly cost of ownership is about what you pay in rent. Check with your lender to see what rates and terms are available and let your accountant do the math and offer an opinion.

3 Rents are on the rise and will likely continue their upward trend. After years of accepting reduced rents to keep tenants in place, landlords in some areas are gaining pricing power again. Trulia reports that, nationwide, rents were up 4.5 percent in the past year. If that trend keeps up, you could end up paying 25 percent more for the same place five years from now. Plus, the pendulum is swinging even higher in some markets. Those of you in hot markets like San Francisco or Denver will likely experience even greater increases.

If you decide that ownership is not for you, or if you don’t have the financial muscle to buy your own place quite yet, consider renegotiating your lease and lock in a fixed rental rate with your landlord to keep your costs down and predictable for the next several years.

4 There may be strategic and tax advantages of real property ownership that help your bottom line. I suggest that you consult with a tax attorney to explore your options and suspect you will find that there are many creative ways to leverage property ownership and make the most of every dollar you spend on overhead.

The bottom line? Take a look at what you are paying for rent. Can you use those same funds to own a piece of property that will likely appreciate as your business grows? If so, make the move!

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