Buying vs. Leasing Office

[40acredropout 2902]

Have any surly 1% small business owners opted to purchase your office instead of leasing?

What were your main motivations and what did you learn along the way?  Biggest benefits / disadvantages?  Did you purchase move-in ready or spend some dollars renovating as well?

 

 

[Chewbacca 7765]

Did it once, would not do again.  We spent a ton of money building it out and then had to find a tenant when the bank on the first floor moved out a year later.  Let someone else deal with that shit.

[Incredulity 11643]

Benefit

asset appreciation 

 

Negative

less flexibility 

 

most of the rest depends on the specifics of the deal, IMPO

[Sbbruin 21825]

Being on the landlord side of the equation, what @Incredulity said is probably the main issue.  People's business situation changes.  They need to add bodies and expand, or decide to switch to a hybrid model, or who knows what.  If you own, you lose the expansion/contraction flexibility.  And owning real estate is a capital intensive game.  You can have periodic BIG expenses that can hurt.  As a commercial landlord, you know that and know that income will fluctuate as a result.  On the flip side, on top of asset appreciation is the equity appreciation.  

Out here, the single tenant owner/user buildings are going for a fortune too.   Hard to make the case for purchase.

[Spaulding Smails 1552]

I have both right now.  Own my original office that we still use, and just signed a lease for our second office.  We've owned the space for five years now.  Had a tenant for a few years as well.  I can make an argument for both.  It really depends on the situation and the type of business.

Obviously, the increase in equity and the freedom / flexibility to do what I want is a huge plus.  The biggest downside is being stuck if your needs change.  You end up making sacrifices for the sake of staying at your own space that may cost you profitability. 

I liked having a tenant, especially one right next door that I could keep an eye on.  But, the random BS was tiresome, and towards the end, we were having to chase them down for rent.  Ultimately, their lease expired and they moved on.  Which was a good thing because I believe they're out of business due in large part to Covid. 

On the rental side, it sure is nice to have a tenant to call when something is wrong.  Love the flexibility piece to be able to move around if needed.  But, beyond paying the rent, you do feel like you're throwing money away when you try to make the space your own, especially if it's a shorter term.

Ultimately, I think we'll end up selling the property we own when our lease is up on the new space (5 years from now) and trying to roll it all into one consolidated space with us as an anchor tenant and other tenants alongside.

[hornian 5210]

Yes. It was either expand to lease the entire floor of the office we were in, or buy a new one. Very glad we bought, and that we bought in 2019 (in Austin). 
 

I have an LLC that owns the building, snd my law firm pays rent to the LLC. It’s nice knowing when I write rent check I’m actually putting some of that towards my own retirement (paying for the principal), plus the appreciation is nice. 

[Sam Lin 3550]

4 hours ago, hornian said:

I have an LLC that owns the building, snd my law firm pays rent to the LLC. It’s nice knowing when I write rent check I’m actually putting some of that towards my own retirement (paying for the principal), plus the appreciation is nice. 

This is the way to think about this. Your company is your company and rent is part of expenses. Your RE is your RE and you think about it as a separate entity, with consideration to appreciation, rental ROI, upkeep costs, all the normal RE considerations. And when your company's needs change and you move to another space, you still think about your RE as RE, do you rent it out and pocket that money (or use it to pay your "company" rent in the new space), do you sell it and earn the appreciation, etc.

[Spaulding Smails 1552]

Yep.  We did it the exact same way for multiple reasons.  Keeps your costs consistent, and you think about it from the a landlord perspective when you have a separate LLC.

My thought has always been that, if I sold the business, keeping the real estate would be a must.  And, to follow up on what I said earlier, the only way I'd sell what I have now would be to upgrade a land ownership stake.  Seems like a no-brainer to have steady commercial rental income as part of a retirement income stream.  

[Guest Lobo]

14 hours ago, 40acredropout said:

Have any surly 1% small business owners opted to purchase your office instead of leasing?

What were your main motivations and what did you learn along the way?  Biggest benefits / disadvantages?  Did you purchase move-in ready or spend some dollars renovating as well?

 

 

My first and most important question---what kinda business is this?  The actual class/type of CRE you are considering buying makes a huge difference.  

[TwiceHorn 31429]

Another factor to consider is whether the small business has multiple owners or is more akin to a sole proprietorship or single-shareholder entity.

A Houston law firm bought its own building a long time ago in an interesting move.  But, being a law firm, had dozens of "owners" in the form of "partners" or "shareholders."  Because the building was not a fungible asset, really, it began to cause a lot of friction among the shareholders.   Complicates buy-in and buy-out.  I believe the property itself was a good investment, as far as that went, but the ownership aspects wound up being a massive headache for them.

If your entity has multiple owners, you may want to create a separate entity to purchase real estate and have the actual business entity lease from that entity.  It's still not a complete solution, but offers a little more flexibility.

ETA:  already stated above, but perhaps a slightly different spin on it.

 

Edited March 17, 2022 by TwiceHorn

[Spaulding Smails 1552]

1 hour ago, TwiceHorn said:

Another factor to consider is whether the small business has multiple owners or is more akin to a sole proprietorship or single-shareholder entity.

A Houston law firm bought its own building a long time ago in an interesting move.  But, being a law firm, had dozens of "owners" in the form of "partners" or "shareholders."  Because the building was not a fungible asset, really, it began to cause a lot of friction among the shareholders.   Complicates buy-in and buy-out.  I believe the property itself was a good investment, as far as that went, but the ownership aspects wound up being a massive headache for them.

If your entity has multiple owners, you may want to create a separate entity to purchase real estate and have the actual business entity lease from that entity.  It's still not a complete solution, but offers a little more flexibility.

ETA:  already stated above, but perhaps a slightly different spin on it.

 

This is a great point.  Things change in business, and it's hard enough to deal with changes on the business side, let alone throw in the real estate aspect.

In our case, we brought in an additional partner (buddy who is a real estate attorney) on the land deal.  It helped us secure the deal on the front end, and it's been good for both parties.  We'll probably start looking for dirt in the next 24 months or so for the next venture, and we'll most likely bring in a different partner for that endeavor.  If RE isn't your core business, and you're looking for something beyond a 100% owner occupied space, having someone with more expertise in that space can be very valuable.  In this next round, we're talking to someone who has more of a developer mindset and much deeper pockets that can really help slingshot a larger play.

[victory88 5663]

I lease a space, roughly 2000 sq ft and I’ll be paying my landlord roughly 1 million over 10 years in rent.  The property was appraised at 2 mil and now it’s 4 mil 2 years later.  If I open a 2nd office, I’ll be buying our building the space.  Lots of tax benefits but I’m sure you can see the headaches people deal with.  
 

I asked this same question to my brother in law who probably has close to 500mil in real estate.  He advised me to start small and get a stand alone buildings where you can rent half out and occupy half yourself and build from there.  I’ll probably do that for my 2nd office build not sure I want to stomach the construction headaches as I’ve been through 2 projects and I hate dealing with morons and contractors.  At the same time, why pay someone else to pay off their property if you can get the financing and rent out your space.  My $.02.

[Chewbacca 7765]

18 hours ago, Sbbruin said:

Being on the landlord side of the equation, what @Incredulity said is probably the main issue.  People's business situation changes.  They need to add bodies and expand, or decide to switch to a hybrid model, or who knows what.  If you own, you lose the expansion/contraction flexibility.  And owning real estate is a capital intensive game.  You can have periodic BIG expenses that can hurt.  As a commercial landlord, you know that and know that income will fluctuate as a result.  On the flip side, on top of asset appreciation is the equity appreciation.  

Out here, the single tenant owner/user buildings are going for a fortune too.   Hard to make the case for purchase.

Don't get me wrong, I love real estate.  But I don't care for the commercial office space.  Give me apartments all day long.

[Sbbruin 21825]

1 hour ago, Chewbacca said:

Don't get me wrong, I love real estate.  But I don't care for the commercial office space.  Give me apartments all day long.

Ugh.  No way.  People are WAY more agro about shit when it's their homes vs their office space, which they can leave at the end of the day.  Plus problems arise in residential when people are home, which is when you are at home.  I prefer to get calls during business hours, when I'm working and our vendors are working.  We have ONE apartment project in our entire portfolio, and it is a royal pain in the ass comparatively.

[Chewbacca 7765]

11 minutes ago, Sbbruin said:

Ugh.  No way.  People are WAY more agro about shit when it's their homes vs their office space, which they can leave at the end of the day.  Plus problems arise in residential when people are home, which is when you are at home.  I prefer to get calls during business hours, when I'm working and our vendors are working.  We have ONE apartment project in our entire portfolio, and it is a royal pain in the ass comparatively.

You don't manage them yourself.  That's just lunacy.  You pay a manager (I gather you are the manager).

[Sbbruin 21825]

7 minutes ago, Chewbacca said:

You don't manage them yourself.  That's just lunacy.  You pay a manager (I gather you are the manager).

We are the owner and manager, yes.  But this is our primary business.  If it was just an investment, sure.  But those management fees do take a bite, though.

[Chewbacca 7765]

2 minutes ago, Sbbruin said:

We are the owner and manager, yes.  But this is our primary business.  If it was just an investment, sure.  But those management fees do take a bite, though.

The bulk of what you're paying as an apartment owner is salaries of leasing and maintenance staff, so you're paying those whether you own the management company or not.  It's only the management fee that would go to you vs. to someone else.  No reason to self manage until you have probably 1000-1500+ units.