With interest rates at near historic lows and the stock market continuing to appear uncertain, many Toronto area business owner/operators have begun to wonder if now is the time to take advantage of opportunities to buy a building vs leasing it.
Ownership can offer many benefits over leasing. With each mortgage payment you‘ll build equity in the property. That equity may increase if the property value appreciates. As owner you have more control your building, deciding such issues as what capital improvements to undertake, maintenance schedules and how big a sign you can put up on the building. Operating costs are often also reduced as an owner/occupier since third party management fees are typically reduced and if you buy you also won’t be subject to rent hikes on lease renewals!
There are of course also disadvantages to ownership. Purchasing a property will reduce working capital which might be otherwise used to expand your business. A commercial property generally requires a cash down payment of 30 to 40 % of the sale price to obtain financing.
Also consider that there may be significant renovations costs required in order to customize the building for your business’s unique operating requirements and financing maybe more difficult to achieve on these items.
Flexibility for expansion and contraction is also an item for consideration. To obtain flexibility for growth it might be necessary to purchase a building which is larger than initially required or one with tenants as you may be able to expand by taking over their space over time.
Perhaps the biggest surprise for first time buyers is the shortage of available commercial properties for sale which are both well priced, and suitable for their business. This is true both for office and industrial type buildings in the Greater Toronto area. It’s therefore important to do your homework upfront to become what I call “Real Estate Ready”. This means establishing your criteria for purchasing and becoming educated on market pricing
Before you buy it is important to know much you will pay on a mortgage vs. how much you will pay in rent. Ideally you should become pre-qualified with lending sources for financing well in advance.
You are also well advised to consult your lawyer and accountant to make sure you structure your investment properly to meet your tax and investment goals.
Once these things are done you will Real Estate Ready and be in a position to act quickly, confidently and with minimal conditions if the property you are looking for suddenly becomes available.
The tax consequences of becoming an owner are mostly positive. Owners are typically able to deduct a portion of the value of the building and improvements each year as depreciation, and mortgage interest. If an entrepreneur purchases the property in his or her own name, the business can pay rent to the owner and the rental payments reduce the business taxable income.
Finally consider your exit strategy. Try to make sure that your use for the building fits well with the rest of the properties in the area so that when the time comes to sell, it will sell quickly and easily.
Hopefully if you bought well your property will appreciate in value and you will enjoy a nice capital gain on the sale