Whether or not a small business should own or rent commercial space is a decades-old discussion. Some businesses, like many retail establishments, may have little choice as prime shopping locations are only available for rent. Other business owners may not believe they can afford to buy, or they may just like the flexibility of a short-term lease. Yet for many small business owners, current market conditions (low interest rates) and availability of advantageous capital from the U.S. Small Business Administration make owning commercial real estate not only a viable solution but also a very profitable one.
The SBA's 504 Loan Program offers phenomenal interest rates and favorable terms for owner-occupied real estate. This means that small business owners, who purchase a building or commercial condo specifically for their business to occupy, can take advantage of a program that enables them to own versus rent and build wealth, rather than just make their landlord rich. And because rates are still historically low, many business owners are actually lowering their monthly facility costs by buying their buildings. Imagine lowering your monthly costs while growing your assets by owning your own building?
Here are some recent examples:
Lock down costs for 20 years
Last year, a growing construction company in Orlando needed to make a change. A 2,000-square-foot industrial building which had served them well for many years started to feel as though it was shrinking. The strengthening economy brought in more work and fueled their expansion. The rent was a good deal as they paid less than $1,500 per month, but the company was bursting at the seams. A commercial broker identified a nearby building, which at more than 5,000 square feet could serve the company well for many years. The owners secured an SBA loan with a 20-year, fixed rate and began paying a little over $3,000 per month for the commercial mortgage. Yes, they doubled their monthly rent, but they also moved into a building two and half times larger. And the best part is that the SBA loan's rate is fixed, so that aspect of their facility cost will remain the same, until they part with the building or pay off the loan.
Double your space but cut costs in half
A company in Georgia rented just over 2,100 square feet of office space for its software business. In 2014, the company paid approximately $109,000 in annual rent. In early 2016, the owners purchased a 5,300-square-foot office building in a comparable neighborhood yet decreased their monthly facility costs by 58%. The business owners now pay approximately $46,000 per year as a mortgage payment. Though they had to contribute a 10% down payment to the overall purchase, the owners will pay off the building in less than 20 years as they are essentially "paying rent to themselves." In this instance, the owners also financed renovation costs and equipment, so the office space was renovated and "like new" when they took occupancy.
Do seemingly nothing and save $4,000 per month
A Pennsylvania company in the auto business had rented a 34,000-square-foot office warehouse and was paying more than $13,000 per month in rent. Earlier this year, the owners took the plunge and exercised a lease option to purchase their facility. This is often an ideal situation because the business doesn't have to incur moving expenses. And because many customers in the market knew this particular company, relocating to a new location might have hampered their business. With a 20-year, fixed rate SBA 504 loan, the owners were able to decrease monthly facility costs by 34%. Their monthly mortgage payment is now less than $9,000 per month. These owners kept their location, lowered their monthly costs by more than $4,000, and in 20 years, they will own the building outright.
Of course, every business situation is different. Some real estate markets may be hotter than others, and finding a property to buy may take some extra effort. However, current market conditions make SBA 504 loans for owner-occupied real estate very attractive options for small business owners and entrepreneurs. With the right building or commercial condo, small business owners can save money and build wealth at the same time. Such deals are tough to beat.