Anyone paying over $1,000/month in rent should consider the option of purchasing their own office, whether it be an office co-op, condo, or building.
Have your small business CPA run the numbers to see if it makes sense and then act upon his advice.
A few things to keep in mind:
Financing: The Main Avenues for Commercial Financing
- Regular Commercial Mortgage – The days of $0 down commercial mortgages are gone. Banks want to see you putting at least 30% of your own money down plus paying closing costs out of pocket (sometimes 20% for professionals such as doctors, lawyers, etc.). In today’s market, you should expect a mortgage length of 15-20 years (unlike residential mortgages that typically have a 30-year repayment period and interest rates in the neighborhood of 6% that only stay fixed for the first 10 years of the loan.
- SBA Financing – As long as the building will be at least 51% owner-occupied, this is an option. In many cases, the SBA loans will allow you to put only 10% down, while the other 90% plus the closing costs get financed. These deals typically include more paperwork, a longer approval process, higher closing costs, stricter prepayment penalties, and annual audits to ensure that the property is still 51% or more owner-occupied. But, if you’re short on cash and cannot come up with 30% plus closing costs, this may be your best (or only) option.
Benefits: The Main Benefits of Owning vs. Renting
- Making a mortgage payment instead of a rent payment each month will allow you to build equity. This may allow you to refinance and pull some cash out down the road if you need working capital (or if you want to invest in other properties) and will allow you to have something of value when all is said and done rather than just having a lease to walk away from
- Having full control of your office rather than waiting on a landlord or building maintenance to make repairs and keep the place up to your standards
- Your rent payment will be fixed each month for at least 10 years and then will only increase slightly if interest rates increase. Whereas your rent payments will increase 3-5% per year. So if you are paying $1,000/month rent right now, you can expect to be paying $1,300-$1,650 10 years from now (a 30-65% increase). Spread that out over the full 20 year term of your mortgage and your $1,000/month rental payment will be in the neighborhood of $1,800-$2,700 (an increase of 80-270%).
- Once your mortgage is paid off, all you end up paying are property taxes, utilities, and maintenance…no mortgage payment and no rent payment
- Especially in the current real estate market, there are many available properties that can be purchased at a deep discount. You can get in cheap, make some improvements, and build immediate equity.
