Owning Your Shop Building

Pros supply strong arguments for the idea that buying (or building) is a better strategy than leasing. April 6, 2007

I currently rent, but recently the owner of the building has mentioned that he would talk details if I was interested in buying. I can think of pros and cons for both. I've been here for three years and have no desire to relocate, so I'm giving it some thought. How has buying worked out for you?

Forum Responses
(Business and Management Forum)
From contributor J:
We purchased our building in 1996. I have not regretted it since. We run a millwork shop, so we have a lot of capital machines that would be a bear to move if the lease was up. Another thing to have in mind is if you ever want to quit, you can sell your equipment and rent the space that you now own. Rent here in KS goes for about $2.00 sqft per year, so our 8300 ft building would go for about $16,000 per year. That is not bad retirement income that you do nothing for.

From contributor H:
I too own my own building. The equity/forced savings of paying a mortgage instead of rent is a good long term thing. Owning your building is also seen by some clients as a sign of stability.

And it helps a great deal when dealing with the banks for occasional financing. I rented the first 5 years I was in business. Bought my first building when I realized my mortgage payment was less than my rent. Bought another, bigger building a few years later. A few years after that I bought the warehouse across the street. I have since sold that one, but still have the other two. Where can you have 19k sqft for less than 1500.00/month?

My shop has never had more that 7 total employees, and most times it was only three of us. Keep it small, keep it all, and invest it in yourself. Whether you sell your building when you retire or relocate or whether you rent it out, you will benefit in the long run.

There are some who would say leasing is the way to go, with all the tax benefits, etc. Sure you can deduct your rent as an expense. But you have had to pay it out first. You've paid for nothing but the use of that space for that month.

From contributor E:
I rented for the first 20 years, all in one location. Was pretty much forced to move, as landlord wouldn't write another lease since she wanted to sell. Bought my own building, occupied it for 19 years. Now it's worth 3 times what I paid for it, plus someone else pays me $3800 a month to rent the 5K sq ft. I'm retired now and wish my other investments did as well.

From contributor B:
Nothing beats owning your building, in my opinion. If you stay around long enough, it will eventually be yours with no payments other than taxes and insurance. That certainly beats never-ending rent checks. As mentioned, there are those who will say there are tax advantages to renting, but personally I like the control and investment angle of owning my building.

From contributor S:
Renting - At the will of landlord, who can and will raise your rates as long as you stay there.

1. Business is not viable and you must close. You are personally responsible to pay in full any remaining rent due on lease terms.

2. Death or serious injury to key man - business must close. You/your family are personally responsible to pay in full any remaining rent due on lease terms.

3. Want to grow business/move. Locked into others’ terms. Dual rent payments while moving.

4. Need working capitol for business or other personal investments. Loan amount will be strictly limited by profits only, no assets. Smaller amount of lending institutions to pick from, meaning less competition and higher rates. Higher APR rate because loan will be unsecured.

5. Taxes. Write off all costs of renting one time. No need to worry about capitol gains taxes, as you have no assets.

6. Adds value to your retirement plan. No!

7. Pass on estate. No assets to pass down

Private ownership - lease back to business. More costly at first, but mortgage payment remains the same as time goes by, eventually becoming zero.

1. Business is not viable and you must close. Rent to another business. Start another viable business at same location. Sell building.

2. Death or serious injury to key man business - must close. You or your family can rent to another business. Start another viable business at same location. Sell building.

3. Want to grow business/move. Use existing building to rent to others and consider 75% of rent as income, creating a higher amount you can borrow. Add onto existing building thereby reducing downtime, use existing equity to finance at a lower rate. Sell building for down payment and moving costs. Defer capitol gains with 1031 rollover. Terms of sale contingent on your own sale, no chance of double mortgage.

4. Need working capitol for business or other personal investments. Ability to get more money with profits and assets. Larger amount of lending institutions to pick from with more competitive rates. Lower APR with secured loan.

5. Taxes. Write off all costs of renting to yourself. Depreciate purchase price over several years, lowering your tax bracket and offsetting income and profits, helping lessen the effects of the initial higher costs of ownership. When it is time to sell, you do a 1031 rollover (like kind exchange), thereby deferring capitol gains. If sale price is over 500k, purchase multiple properties to spread profits around. Make the primary purchase a secondary home, thereby qualifying as an investment property. Immediately sell current primary residence and move into secondary home. After 5 years federal tax laws, consider this eligible as your primary residence and give you 500,000 per couple tax free. If need be, do this multiple times till all properties are sold. Once they are all sold, you have paid not one dime in tax on your capitol gains.

6. Adds value to your retirement plan. Yes. In fact, if you take advantage of all current tax laws, this will be a huge part of your retirement plan.

7. Pass on estate. Federal tax laws allow $2,000,000 to be handed down to your family/will recipients, completely tax free.

From contributor T:
In my opinion, if you want to own your own building, building your own building is the only way I ever would. But that's just me. I’d never sign up for a $500,000+ building when I know I could build a new building how I wanted it for half the cost. That's what we did. Never ran an excavator before in my life, but after 8 hours I was a pro. We rented equipment and did everything from running the water and sewer, pouring the slab (you know how we figured out to pour a 10,000' slab? We got a book, then used our own crew), erecting the metal, drywall. We built a 10,000' shop, from start to finish, in under a year while maintaining full production at our current shop (at the time). Would I do it again? Hell yeah! And if the business doesn’t work out, you still got the building to come out on top. This might be bad advice for most. I’d only advise it if you knew what the hell you’re doing and you were very motivated, not to mention somewhat intelligent.

From contributor G:
Contributor S hit it on the head. Buy the building as an individual investment, and lease it back to the company.

From contributor O:
Also keep in mind that rental income that you receive as an individual is not subject to FICA taxes on a federal level. So you can pay yourself a modest salary and a high rent and save on taxes.

From contributor Y:

One other idea to consider is this, something I have done over the last year. My wife and I bought the property, built a 7200 sq. ft. shop, and are now leasing the building to our business. That way, if the business has problems, or the family gets into a squabble regarding what to do with the business should something happen to us, the building is a separate entity that can be rented, sold or whatever. Did it as a recommendation from my CPA, seemed smart at the time.

From contributor L:
I rented for quite a few years as my business slowly grew. Then I had a contractor build an 8000 ft building and used half, then took over the other half, then added 7500' on, then added 10000' on. Now need to add on an office, area break room and storage - 3000'. I own the building and lease it to my business. Leases around here go for $4/'/yr triple net.

If I was to start over I'd be more careful about planning for expansion. Also, we started with a metal building that used ridged frames and 80' clear spans. The clear spans are very good, but the ridged frames (columns that taper from the base to deeper as they go up) cause problems with cantilever racking. Our building has 18' sidewalls and about 23' at the peak. If I was to do it again I'd go higher. It would allow better double decking or second floor space and all the stuff that gets hung from the roof lowers the effective height. Duct work, sprinklers, lighting, heating, compressed air, and electrical. For our board materials we use cantilever arm racks for small amounts to make it easy to get at all the kinds. When we get in 10 or 15 units of the same material, we stack it 5 units high on the floor.

The other design consideration is major tool placement. Do your layout for adding new tools without having to move the existing ones too often. If I were to start over I'd also do bus duct instead of wiring in conduit. More expensive up front, but cheaper when you have to rearrange. We started with 400 A 3 phase power but had to add an additional 400 A with the last addition. Now we are bumping that limitation. I hadn't considered conveyors when we started; we now have all of our panel processing area and assembly area equipped with roller conveyors - much better than carts, but if I had known I was going to do that, I could have made it easier by considering it in the building plans. Look into your crystal ball - how far in the future can you see?