I have talked to many people who want to buy a business and the issue of buying the business real estate often comes up. They usually ask “Should I buy the real estate when I buy the business?” Unfortunately, like many issues and decision you will have to make is that “It depends!” But, I will not leave you hanging, I’ll give you a little more detail and information.
What “buying the real estate” means when buying a business
Two things to consider before we get into the topic.
- Not every company will have real estate. This really depends on what industry the business is in. Some do, some don’t
- If a business has real estate there are usually 3 choices. They want to sell it with the business, they don’t want to sell it, or they want you to lease it from them.
Expert Tip – Sometimes a seller will only sell you the business if you also buy the real estate. There is nothing wrong with this, it is up to you to decide if this works for you.
So, getting back to the business real estate. Let’s break down what we mean by “buying the real estate.” When you purchase a business, there are typically two assets that could be available: the business itself and the real estate that it uses for operations.
So when someone says “Should I buy the real estate?” they’re essentially asking if they should acquire the property that the business is located on. This could be one location, or multiple locations depending on how the business operates.
Now, to “sort of” answer the question, I’ll give you some pros and cons to help you decide what is best in your particular situation.
Pros and Cons of buying the business real estate
The Pros:
- Control: When you own the real estate, you have complete control over the property and can make any changes you see fit without having to get permission from a landlord (but don’t forget your pesky local zoning laws). This means that you can customize the space to suit your specific business needs and make changes as your business evolves over time.
- Appreciation: Real estate typically appreciates over time, so if you hold onto the property for a few years, you could see an increase in value. This can be a great investment for your business, as you’ll be able to sell the property for a higher price down the line and use the profits to grow your business even further. You could also use the property as collateral for future loans.
- Fixed costs: Owning the property can also provide a sense of stability, as you’ll have fixed monthly costs for things like mortgage payments and property taxes. This can be a nice change from the unpredictable expenses of renting, where landlords can raise the rent whenever they wake up and decide to do it.
- Tax benefits: When you own the property, you may be eligible for various tax deductions, such as mortgage interest and property tax deductions. These deductions can significantly reduce your overall tax burden and provide much-needed relief for your business.
- SBA Loans: If you are thinking about getting an SBA loan, buying the real estate can extend your loan term beyond the normal 10 years.
The Cons:
- Capital: Buying the real estate requires a significant amount of capital upfront or a much larger loan, so make sure you have the down payment or cash to make the purchase. You will have to have a good cash-flowing business to make sure you can make the mortgage payments, pay for maintenance and taxes, and still put money in your pocket.
- Maintenance: Owning the property also means you’re responsible for maintaining it. This can include fixing leaky roofs, repairing broken windows, and even dealing with stubborn squirrels that refuse to vacate your attic. These responsibilities can be time-consuming and expensive, so it’s important to factor in these costs when making your decision.
- Lack of flexibility: If you end up outgrowing the property or if the area doesn’t suit your needs as well as you thought, you may have trouble selling the property or finding a new tenant. This can make it difficult for you to relocate your business if you need to, so it’s important to carefully consider your long-term plans before making a decision.
- Risk: Real estate is a long-term investment and comes with its own set of risks. The value of the property could drop, interest rates could go up, and various other factors could affect the value of your investment. It’s important to think about how your business may grow and what you will need in the future.
Go deeper on buying business real estate
If you want to learn more about buying a business with real estate you may want to take a look at “Go Do Deals: The Entrepreneur’s Guide to Buying & Selling Businesses“. This book can help you understand all of your options when buying a business and help you think about what works best for you.
This book helps you find the right deals and how to negotiate them. It is pretty good at explaining the overall process. It is worth a look.
Final thoughts on buying the business real estate
So there you have it, we told you the pros and cons of buying the real estate when you buy a business. Ultimately, the right answer depends on what type of business you are buying, how it will grow, and do you have the money required to get a deal that includes the real estate done.
There is no right or wrong answer that we can tell you today. Hopefully, we have given you the information to help you decide what is best for your situation.
Now, go out there and control your future.
