Should You Rent or Buy an Industrial Building?

This depends on who you ask – the landlord says you should lease, and the contractor says you should build and buy!

Here’s what we have seen:

• Many large companies that we lease to do not own their own building because they receive a better return on their money from their business equipment or from producing their widget than they do from owning a building.

• Many large companies don’t want to deal with the operation of a building and would prefer a landlord to deal with it. They also like the fact that when the lease ends and they want to leave the area, they can leave – without having to sell the building first.

• Many small companies lease to get started because they may not have the capital to buy or build at that time. They, like large companies, want to use the capital to build the company and will often get a better return doing that. They may also want to see what the market does or to have options to see how their business grows, and then build when they know exactly what they need. 

Why do people want to own buildings?

Real estate in the right county or city can be a great investment. On average (when placed in a good area) it keeps going up in value. Maybe a business owner wants to build a building for their business and sell the business or live off of the rental income when they retire.

What does it cost to own instead of lease?

Let’s say you have an option of a mortgage of $10,000 or a lease payment of $10,000 per month – which is more expensive?

Sounds like a trick question.

The answer:

It costs more to own than to lease, from a tax perspective.

Why? 2 reasons:

• A lease payment is a 100% write off which means you can write off $10,000 x 12 months = $120,000 per year.

• When you’re buying a building, the write off is only approximately 3% of the building payment and 0% on the land! What?!!

Without getting too far down the rabbit hole of a tax lesson, it takes more cash per year to pay extra taxes and purchase a building.

*Note: Not all factors are included in this example. This does not mean you should not buy a building. Do the numbers, and if it makes sense, purchase a property!

Should you put it in a holding company or in your operating business company? We will have to meet in person to get that answer. See you soon!