We have been looking at slower economic times for a few months and the reality of a more sluggish economy is facing most service business operators. Add to the reduction in economic growth the lingering economic effects of the Sept. 11 tragedy and you have another challenge for your business: where to get more revenue. Cash flow can easily be a problem when business slows.
However, I want to offer an idea that you may have considered at least once before and explore it in more detail. I am talking about owning your own building. Before you object and assume it will increase -- not decrease -- your monthly financial obligations, let's look at some of the advantages of owning the building where you operate your business.
AdvantagesYou couldn't pick a better time to purchase a building, for several reasons. First, when the economy slows, prices come down. Additionally, mortgage interest rates are very low, which keeps your payments low. Low prices and low payments; that's hard to beat.
When business picks up and the economy is booming again, you will still have the same low payments, but your building will increase in value. The appreciation from your building will be part of your nest egg when you sell. You'll be able to rent it and receive income or sell it outright and receive a lump-sum payment.
If you look at the way most successful people accumulated their wealth, you'll see that real estate was involved. Starting on a small scale, you should first own your home. It's a good way to set aside funds for the future. After owning your home, the building where you do business is your next objective. Both give you many benefits, especially not having to move.
Businesses face this prospect sometimes when it is not attractive to get a new lease somewhere else. If a landlord can rent his property for more money to another type of business, when your lease expires you may get hit with a big increase in rent or be forced to relocate -- at a time when rents are high.
Also, anyone who leases a building knows that the improvements you add to the building -- that you paid for -- become part of the landlord's property. So when the lease is up those improvements may go to someone else, despite the fact that you paid for them. You only get the benefit of any improvements that you add to the building you lease while you are leasing it.
For example, if you add shelves in the warehouse, they stay at the end of the lease. Any office improvements or additional build-out you add becomes the property of the landlord. If you leave and lease another building, you have to pay for improvements again.
If you own the building you can set it up anyway you want to. There is no need to get permission from the landlord to make any changes. Plus, everything you add increases the value of the building in the future.
Owning your own building is also a tax deduction. More good news: The interest you pay on a mortgage is a business expense. That means you can deduct it, just like any other business expense, from the amount you generate in revenue that is subject to income taxes. As a result, the interest expense you pay, which is most of the payment in the early years of a mortgage, is paid for out of what the accountants call "pre-tax dollars." The net benefit is that, since the interest in deductible, you are paying, effectively, a lower rate of interest. More savings.
Another tax benefit from owning comes from the fact that you pay no tax on the increase in value of the property while you own it. Only when you sell is there a taxable gain. So you are accumulating net worth without having to pay tax on any increases.
SBA HelpsMost small businesses are not cash rich, nor are their owners. Many do not have either the necessary down payment or assets it requires for a traditional bank loan. The government recognized this limitation of small- business owners and has provided assistance.
Through the Small Business Administration (SBA), low-interest loans that usually require only 10 percent down payments are available. The government, through the SBA, backs the loan. Typically the SBA is responsible for 40 percent of the loan while the bank is responsible for accepting 50 percent of the risk and the small-business owner is able to secure their portion with only the remaining 10 percent.
The loans small-business owners need to buy their buildings are easier to get because of programs like those sponsored by the SBA. You are entitled to these benefits, just like other small business owners, so you should take advantage of the opportunity. Talk to a banker familiar with SBA loans or someone directly at the SBA to get the details.
Trends & TipsIf you look at recent years' trends you'll notice that the cost of buildings continues to escalate. While, at the same time, the cost of mortgages (interest rates) has declined. This trend is a good one to participate in because your costs decline while the value of your building increases.
Also, try to buy a building larger than you need. Not so much because your business will rapidly expand -- although it could easily do that and you'll need space -- but because you can rent out a portion of the building to generate revenue. That way, a tenant will help pay for your mortgage. Besides, the SBA likes to see revenue produced from buildings they loan money on.
Attempt to find a building where your business will occupy a little more than half of the space. That will allow room for expansion as well as provide an opportunity to rent some of the building to generate extra cash.
Most of us don't plan ahead enough for any retirement, so having a building is one sort of a forced-savings investment. Every month we build equity value by simply paying for a place to run our business.
Remember that most wealth accumulation is from some interest in real estate. Why not make your payments for rent pay off in the form of appreciation, tax benefits, future source of cash and, yet, accomplish it all with the SBA's help?
Start looking for your new building now.