So, you’re ready to take the “leap” and move your DJ business headquarters from your home to a commercial space. The BIG question is, would you better be off buying or leasing? Well, that depends on various factors. Here are a few of them to consider before talking with your accountant about which option best makes the most financial sense for you.
- Is your mobile entertainment business well-established? By leasing, you’re free to back out at the end of your lease’s term; however, if your business already enjoys a steady income stream, purchasing a space may be a good investment in this down economy, as real estate prices are low.
- Is your company likely to keep the same number of employees? Before buying property, think carefully about your plans for growth — and how well your purchase will accommodate your vision down the road. If there’s a chance you might hire more employees (and need more space) in the next few years, locking yourself into a location long-term could prove counter-productive.
- Are you ready to be a landlord? Owning a commercial space is a lot of work, and you’ll be responsible for regular maintenance and upgrades. On the bright side, there are tax benefits to owning your own building, and you may earn a secondary income on tenant rent (think photographer, videographer, photobooth company, etc.). There’s also the potential for asset appreciation from the building’s eventual sale.
In recent months, PMDJ writer, Mike Walter, made the move to buying a commercial building for his company, Elite Entertainment. I asked Mike for his advice about leasing vs. buying.
I look at it as a long term investment. My business was going to be spending $40-$50,000 a year over the next decade in rent anyway, so why not have my business pay that rent to me?
I set up a separate LLC and purchased commercial space. Now Elite’s monthly rent covers my mortgage payment. I was able to get great financing terms so in 10 years I’ll have paid the office off.
With real estate flat and interest rates low, it seemed like a no-brainier. But the key ingredient was liquidity. I had enough in my personal savings to put about 30% down which nowadays the banks want to see with commercial loans, and that also lowered the mortgage enough so Elite’s rent check covers it.
If I didn’t have the savings I’d have looked to lease space again. But the way I see it, Elite was moving out of space we’d rented for 10 years and after paying almost half a million in rent and common area maintenance over that decade I got a handshake from the landlord (and then had to wait 3 months to get my lousy $4,000 security back.). Instead of “paying the man” anymore I’ve become the man. It feels good.”
It seems like Mike’s investment is going to work out well for him, but buyer beware…Seek the advice of an accountant or financial planner before “getting in over your head.” I know the owner of a successful multi-op who about six years ago, purchased a large commercial building for his company. Without any tenants and a large mortgage payment to make every month, he ended up having to sell his business. Don’t let this happen to you!
What your thoughts on leasing vs. buying?