When Does It Make Sense To Buy Your Business Real Estate?

March 2011

With commercial real estate in a downturn, if you've been toying with the idea of buying a building for your business, this may be the right time. There are myriad advantages to buying. It's one cost you can control (e.g., no rent increases or lease negotiation) and it could be an excellent investment.

But you need to know that purchasing a building, instead of renting space, is the right move for your business in the long run. To make sure buying your space is a sound approach, consider these points:

  • Do the math. If you're low on liquidity, renting may make more sense. Purchasing a building involves hefty upfront expenses for a down payment, appraisal, building inspection, loan fees, and related costs. Even an established firm needs to exercise caution. OFM, a 26-employee furniture distributor, recently purchased a building in a market area it's been doing business in for five years. "We've grown our revenues enough in the new location that we're comfortable making the move," says Abel Zalcberg, who runs the business. "Your expenses have to be in line with your profit margins before you can purchase your own building." In short, if you're not well capitalized, it's probably not a good idea to buy.
  • Consider how fast you're growing. If you're likely to be bursting at the seams in the near future, buying might be inefficient. Instead, consider renting in a building with extra space that you can lease as needed. If you do outgrow your building, there are other options, such as leasing your old space and buying a new one, or expanding your current facilities.
  • Determine the infrastructure work you'll need to do. If you have to make major investments in wiring, lighting, HVAC, and related systems, it might be better to do that work on a building you own. Otherwise, you risk doing it all again in your next rental.

Sources: Buying a Building for Your Business, Open Forum

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