To Buy Or Not To Buy Office Space
Hi Everyone,
Would like to get your advise. I own a small business and need to expand our office space which we currently lease. My options are currently to look at buying as opposed to leasing. A cash flow analysis seems like it would make sense to buy. However, one of my friends is telling me to invest the down payment in residential real estate ratther in office space. Since I am a newcomer to the office space market, a few questions come to mind:
1) What are the typical appreciation rates of office buildings as apposed to residential real estate. (I know this will vary by region but is there a pattern to this variation?)
2) Should I even be looking at appreciation when cosidering investing in office space?
3) How easy is it to sell office space as compared to residential space?
4) What about financing? Are the rates and terms similar to residential rates?
Answers to these questions as well as any insight into this would be greatly appreciated.
-- Joe
Joe,
Here's my take on this, hopefully others will jump in:
1) This will vary so much by region that I can't even try to answer it.
2) Sure, look at appreciation. But there's a lot of other factors. See below.
3) Office space is harder to sell. It takes longer, because there aren't as many buyers.
4) Financing is different. You won't get 30 year loans, although you may get 20 years.
My take on this is that you need to have the space in order to run your business, so why rent? Particularly these days, when interest rates are so low. Most small businessmen can't afford your friend's suggestion of buying residential AND continuing to rent your office space. Where's the extra cash to buy residential supposed to come from? Whereas taking your office rent money and making it a purchase deal is a great return on your investment. And no extra cash is required, IF you have the downpayment available.
Another thing, you're busy running your business. Are you gonna start a second career being a residential real estate landlord? Who's got the time? Even if you get a management company, it's going to be a distraction. I'd say stick to your knitting, run your company, and own your space.
Finally, what many small business owners do is buy the property in their own name, and then rent it to their business. If you ever sell the business, you keep the building, and keep renting it to them, or to someone else if they move. It's a nice retirement benny, paid for by the company. You get the ownership "for free", after putting in the downpayment. The monthly payments are funds that would have gone to your landlord in a lease situation.
Think about it...
CT
Thanks for your insightful advice. BTW, I own a small software business.
Regarding CT's "mind your knitting" suggestion, this is what I told my wife (not so colorfully though). Thanks for reinforcing the notion.
And commercialking's thought on using the downpayment as business expansion capital is also very valid. We have just about what it will take for the down payment for the office space plus a little bit of a cushion. Cash flow will not be a problem. Should we use this money for business expansion or in buying space I guess will depend on where the ROI is better.
And what a great idea of owning the property and renting it to the company!
One of the other options we have is to take a second line of equity on our residence (we are fortunate that in S. California, housing prices have gone up through the roof) and use this as a downpayment for the office space. Any thoughts on this?
Generally home equity money is the cheapest money you can borrow. Assuming you are a young man I'd borrow all of it I could. All you have to do is invest it in things that will earn a higher rate of return than you are paying the bank. Your office space might be an example of that.