Whether you lease or own your facility, you are committing your organization to a certain economic obligation. When you lease a property, you commit to a specified rental payment for an allotted period of time. Leasing does provide some flexibility, but you will have to negotiate a renewal or relocate once the lease expires. In addition, if you need to get out of your lease before it expires (due to a contraction, consolidation, expansion, etc.).
Should you own your own building?
You will either have to sublease the space or negotiate a termination option with the landlord. When you buy a facility, you are committing to a mortgage payment and allocating cash towards a down payment. If you outgrow the building at some point down the road, you might need to sell or lease it out. If you contract, you can always lease out the portion of the building you will not be using.
The point is this : Both leasing and owning require a financial commitment. Both have qualitative differences. At Bacon Commercial Real Estate, we can help to make sense of all available options so that you can make an objective decision of whether to buy or to lease.
Here is a simple look at some of the economic factors involved with ownership that clearly illustrate the long term benefits:
- Appreciation and Leverage: When you buy it right, real estate can be the most effective hedge against inflation. You can hold your occupancy costs down with long term low interest rate financing. Assume you buy a $500,000 building with a 20% down payment ($100,000). If the building increases its value by 10%, in this case $50,000, you have just experienced a 50% return on your original down payment.
- Annual Return on Investment: Your annual occupancy costs (mortgage + building expenses) will be less expensive than leasing costs. To illustrate, assume that the building in the previous example would lease for $10,000 a month, and to own the building your cost would be only $7,500 a month. The difference is $2,500 a month or $30,000 a year. Your annual return on the $100,000 down payment is 30% ($30,000 ÷ $100,000 = 30 %.) So, while it might be a challenge to come up with the down payment, it is well worth the return on investment.
- Tax Advantages: Interest on a loan for an owner/user is fully tax deductible. Depreciation is an additional tax break for commercial property; the owner/user can deduct 1/31 of the property’s improvement value (you cannot depreciate land). For example, if the value of a property is $500,000, the annual deduction would be $16,129.
- Identity: An often over looked benefit of ownership is building identity. This identity can be in the form of the company’s name on the building.
- Control: As the owner, you are in control. You control your costs, your growth, and who your neighbors are. You also control your exit strategy.
Contact Tom Bacon for all of your Sacramento Commercial Real Estate needs. I have been providing unmatched Commercial Real estate solutions since 1984 for owners and occupiers to help guide them on the path of success. My experience, creativity, compassion, detail oriented approach, and analytical drive can be seen in each and every transaction.