Have You Done the Math?

Why buying your own commercial building may be the smartest thing you ever do.

Owning

Leasing

Why does this analysis matter? Take your current monthly rent expense and multiply that by the number of months left in your career. If that number doesn’t sufficiently bum you out, you’re either almost retired (congratulations!) or don’t have a functioning calculator.

Many business owners don’t realize that owning your commercial building is a similar total expense to leasing but owning comes with significant financial benefits.

Case Study For A Business Owner Who Needs 2,000 SF Of Office Space:

Leasing Expense:

  • $4,000 per month ($2.00 PSF ave. rent x 2,000 SF in Folsom, CA)

Owning Expense:

  • You can buy a 2,000 SF office condo for $450,000 in Folsom, CA
  • $2,250 per month loan expense (10% down SBA loan at 4.5% interest)
  • $450 property taxes per month
  • $200 building insurance per month
  • $500 assoc. dues and maintenance per month
  • $3,400 total ownership expense vs a $4,000 per month lease

6 Major Financial Benefits To Owning Your Commercial Building:

#1. Monthly Equity Growth Through Principle Pay Down

When you pay commercial rent, you’re paying down someone’s loan. Would you rather pay down someone else’s loan or build your own equity? In the example above, roughly 33% of your monthly loan payment pays down your loan. This means an extra $9,000 a year ($750 per month x 12 months) toward your retirement.

#2. Own An Income Producing Asset

Speaking of retirement, imagine if you owned a $450,000 piece of commercial real estate free and clear in 25 years. You could lease it to someone else for ongoing monthly income or sell for a nice gain. Or you can pay someone else hundreds or thousands of dollars in rent for over 25 years. It’s up to you.

#3. Tax Savings From Deductible Interest

The IRS* allows you to deduct the amount of interest you spend every year on your commercial loan. Continuing our example, the office condo pays $1,500 a month in interest which works out $18,000 in annual tax deductions. If you’re in the $84,000 to $160,000 income bracket, you’d be taxed at 24% per year* so these tax deductions are worth $4,320 per year. That’s enough to put a dent in your child’s college savings or towards something more practical like a used Waverunner.

#4. Tax Savings From Deductible Depreciation

Commercial real estate properties also allow you to deduct annual building depreciation. Commercial buildings (less the value of the land) can be depreciated according to a set schedule over 39 years. That’s about a $10,000 annual deduction for the office condo. In the 24% tax bracket, that works out to $2,400 a year in tax savings.

#5. Building Value Appreciation

Let’s assume the office condo discussed appreciates right along with inflation at 3%. We’ve seen much better appreciation, but let’s stay conservative. A 3% annual increase in value on $450,000 means a $13,500 annual increase in value per year. You can own an appreciating asset or you can pay rent and help someone else own an appreciating asset.

#6. Lock In Your Monthly Office Expense Now To Save In The Future

You know what also goes up about 3% every year? Everything. And everything includes your office rent. Do you think office rent was more or less expensive 25 years ago? Now imagine you locked in year 1995 rents to pay roughly the same amount in 2020. There are various loan types, but going with a fixed rate means your monthly loan amount is the exact same every month, regardless of inflation. Of course, other building expenses such as property taxes and insurance will still inflate but still locks in a majority of your monthly office expense at today’s prices for the next 25 years. We won’t quantify what that means or include it in the total return, but it definitely adds value.

*Carlsen O’Connell is not a licensed CPA form so any tax calculations or analysis of tax impact should be doublechecked by your CPA. We know more about taxes than brain surgery, but I wouldn’t let us operate on your either.

For Those Of You Keeping Score…

The business owner that purchased a 2,000 SF office condo gets $29,220 PER YEAR in additional benefits by owning instead of leasing. That’s $9,000 in principle pay down, $4,320 in tax savings from deductible loan interest, $2,400 in tax savings from deductible building depreciation, and $13,500 in estimated asset appreciation. Remember this is based on an investment that only required a $45,000 down payment (10% down SBA Loan). Your Uncle Harold may have some killer stock picks, but I doubt they can provide that kind of return.

I hope this article convinces you to do the math for your business. If you don’t have the time to run the numbers, we can do the analysis for you for free. Contact us at 916-287-7439 or CarlsenOConnell.com and we’d be happy to help. Feel free to call us anytime with questions about buying a commercial building, renting office space, or life in general. We definitely know a lot about the first two.

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