5 Perks of Commercial Real Estate Ownership
One of the biggest decisions you’ll face as a small business owner is whether to buy or lease your space.
If your need for space is evolving, you should familiarize yourself with the various pros and cons of each option. For guidance, reach out to a business banker at Western State Bank to find the best solution for your business.
For now, we’ll dive into five key advantages of owning commercial real estate:
Turn an Expense into an Asset
Commercial real estate has historically delivered very strong returns.
Virtually nothing in business comes without a cost, so it’s a bit too simplistic to say that paying rent is “throwing money away” – but it certainly doesn’t offer the long-term investment potential of buying your own storefront, office space, or industrial facility.
Over time, your monthly mortgage payments will build substantial equity. While investments never come with guarantees, commercial real estate has historically delivered very strong returns. Depending on the location, the economic conditions of the moment, and other factors, commercial properties have an ROI of between 6% and 12%. That’s greater than many major equity indices. The purchase of a single-family home may yield an ROI of 1% to 4%.
Add a Revenue Stream
In most cases, to qualify for a basic commercial mortgage, a business must occupy at least 51% of a property it buys. That leaves up to 49% of your square footage to rent out, establishing a secondary source of income.
If you need office space, consider purchasing a multistory building and leasing out the ground level to a retail business or eatery that would benefit from the accessibility and visibility. If you need a production facility and expect to grow your operations down the road, you might be able to lease extra space to smaller startups until you need it yourself.
Enhance Your Rental Income
Even if renting out a portion of your square footage is already a key element of your growth plan, you may not have considered all the ways you could maximize and diversify this type of income flow.
Instead of leasing office space to a single business, you could lease to hybrid professionals looking for a dedicated workstation with shared amenities. Renting out event/meeting space can also bring in extra cash on an ad hoc or ongoing basis. Charging your tenants for premium features like parking, storage, and cleaning services may be another option. If your property is in a high-traffic location, consider selling outdoor ad space.
Enjoy New Tax Benefits
If you lease your space, you can usually deduct your monthly rent payment as a business expense. However, owning your own property can provide significant advantages at tax time, too.
In nearly all cases, property owners can write off mortgage interest – and mortgage payments are interest-heavy at first, so this is a front-loaded benefit. Additionally, while real estate tends to appreciate over time, the IRS allows owners to depreciate commercial properties over a set period (usually 39 years but sometimes less). While the IRS may recapture these deductions if you later sell the property at a gain, depreciation can offer significant year-to-year savings. Consult a trusted tax advisor.
Enjoy More Stability and Control
Some of the most important benefits of property ownership are the hardest to quantify in dollars and cents.
For starters, you may have greater peace of mind knowing that you won’t have to deal with rent hikes or having to relocate unexpectedly. You may also have far greater latitude when it comes to the use of your space. You won’t be up against landlord-imposed restrictions, and you can remodel the space to suit your needs (and retain the value of those capital improvements). Plus, you shouldn’t have to put up with problematic co-occupants – you can have the place all to yourself or choose what type of tenants you lease to.