Here is a great question that came in to me from the blog:
I am a small business owner and currently employ 1 full time worker and my wife. We opened in 2008 with 4k and lots of prayer, we’ve had several bumps in the road but nothing that would be considered a “stupid” mistake, praise the Lord. We currently rent a portion of the building, the business is growing every year.
I feel like we are starting to outgrow our current location, at what point should/could we start to look at investing in commercial property?
Thanks again for all you do! God Bless.
It’s a fantastic question, with not a lot of details to go on. So I can’t really answer you specifically, but I can generally. Buying commercial property is a BIG decision. And I dare say, way to many businesses jump at the idea because it seems so cool to be able to own your own place.
And yes, there are a billion people who would argue that it’s a smart investment. I’m gonna tell you that it’s just like buying a house. I prefer that if you’re going to buy a place, that you do it for cash. Hold on opposing view commenters, keep reading first.
I think you should run your business debt free. That meeeeeeans completely! Business is tough. Leveraging yourself just makes it that much tougher. And for all of the people who just said, “psshhh…you can’t run a business debt free!” You are incorrect. Read Can You Run A Business Debt Free?
When you decide to purchase a building with debt, you’ve now added that “fixed” expense to your P & L, that will still be there even if you have to close the doors. Now you have a payment that you HAVE to make no matter what. Instead, rent as long as you possibly can, and save the money for the purchase.
If you don’t have the money, and you’re outgrowing your current space, then start by budgeting out the next five years. How big do you project to be five years from now? How much in sales? How many team members? How much storage space will you need?
When you know what that looks like, now you can start looking for a place that will fit you now, and allow for growth. This will also allow you to put a ton of cash away for a potential purchase five years from now. Now you have a plan for growth and ownership.
So many people tell me that they can grow so much faster if they just go into debt. Sometimes you can. But what ends up happening, is you shackle yourself as you grow because you’re still heavily in debt. And I know we’ve never had a downturn in our economy here, so we really don’t need to worry about business suffering…right?
Question: What are your thoughts on the right time to buy commercial property?
Hard to argue with that logic. I think it’s just like so many other decisions we make. We’re emotionally attached to having our own place…and everyone says its the “smart” thing to do. But like you said, you will add a huge payment! I really appreciated your suggestion of a 5 year budget too. It would be DOUBLY bad to go into debt AND outgrow your purchase in a couple years. So when is the right time? I totally agree with you. When you have the cash and have a good forecast of where your business will be in 5-10 years.
Thanks Mark!!
Uhhhh, youre welcome? What’d I do? Haha
I couldn’t agree more. Be debt-free, cash-only, bootstrapped & proud. And if you think Dave’s the only successful guy preaching this, think again. I’m not certain that every one of these companies are completely debt-free, but they have avoided the other big trap that seems to draw in fledgeling businesses, venture capital: http://37signals.com/bootstrapped
This is something that we have had many discussions on here in our business. It should follow the logic… The bigger the purchase, the longer it should take you to decide. Last year, we decided to sign another 5 year lease. Our hope, is at the end of that lease we will move to a property that we own. Now a year later, I am sooo glad we waited. In addition to buying the property, you are expanding the business to “Fit ” the expense which costs more money – putting you in more debt… Timing is everything!
So true!! I can’t tell you how many people have told me the same thing. They waited and they are happier!
I love that idea of the bigger the purchase, the more time spent on the decision!!! That has application throuought life!!
Makes so much sense, and I think that’s why so many businesses, large and small, get into trouble. Projecting 5 years out not only the budget, but location, office space and storage needs is so logical. We’re facing a bit of this at the nonprofit where I work, and it’s a scary prospect to be locked in. I’m so glad we’re waiting and planning more before making the plunge. Great post, as usual, Chris.
Imagine as a non profit if the donations dried up AND you were stuck with a huge payment. That would totally suck.
ChrisLoCurto Absolutely! Actually, it probably wouldn’t hurt to project further than 5 years – might need to suggest that…
Generation 2 with help from Early Generation 3 took on big debt and built state of the art facilities. Doubled capacity, enter material shortage, money shortage, close business 2 years later. Generation 2 continues on with smaller company, grows with cash. Late generation 3 (me) joins in. Having not learned the above lesson, built with debt and while it has survived–at what cost? Debt is like the frog in a pan of water on low heat, before the frog even knows it the water if boiling! Year 2 of five year plan to operate dead free! And generation 4 has been shown the lesson—learning????
“dead free” will be great, but I meant Debt free!
John Briese Sorry to hear the bad side of that John, but it looks like you are on the right path!
It’s so true. If you were to think of your business like you think about your personal finances, you probably wouldn’t make so many over-leveraged decisions (then again, maybe you would!). I’ve met one too many business owners who think owning a building is the sign of a healthy business instead of having a ton of cash reserves.
joshlawsonwaco Alright! A financial guru weighing in!! Glad to have you hear brother!!
I think you nailed it here. We don’t go into business expecting to fail but we must factor in worst case scenarios when making big decisions.
JoelFortner Wurd!
This principle works the same in church world as well. Too often church planters want to “launch big” and purchase a building before they are ready, only to see the plant never grow.I have a buddy who recently left his ministry because of the stress he felt as Pastor to make sure the mortgage was paid (they owe 1.8
More: $1.8 million on the campus). If your desire is to “glorify God” in your business remember that the word “glory” at it’s root means “to reflect.” So you must reflect the idea that the borrower is slave to the lender!
joelgrizzle Amen!!
Amen! I’ll be sharing this one for sure. Every business owner needs this perspective, Chris. As for when to buy?… When you’ve got the money! If you need a bigger truck to sell more watermellons, so that you can be more profitable, so you can pay for the bigger truck… then you may not need to sell more watermellons. I don’t want to use your comments section as a platform, so I won’t link it. But, I wrote a blog back in May “Sacrificing the Fast Track for Slow Growth”. It’s about intentionally growing a business slowly, conservatively, and with minimal risk while resisting the lure of the bright shiney wrapper of the Fast Track.Also, I’d like to offer the term “More Watermellons” for consideration into the CLoBlog dictionary.
CabinetDoork Sounds good, but we will have to leave out the extra L in watermelons. 😎 Lily is the Keeper of the Glossary, and I don’t see her here today. . .
cabinart Quoting Eddie Murphy from Trading Places (Train Scene)… “Thank you for correcting my English, which stinks.”
Q: What are your thoughts on the right time to buy commercial property?A: When you have enough money to buy it and run your business revenue-free for at least one year (emergency fund).Or so I tell clients. Most common reply: Oh, that will never happen. So you’re just saying to never buy our own place?Me: With an attitude like that, you’re probably right. And no. I’m saying you do it when the time is right. When you will view it as a blessing, not a burden.I’ve never bought commercial property…unless you count the office we built in our basement…I paid a lot for that in cash 🙂 So maybe I am the wrong person to ask, but I get asked a lot.I’ve rented office space plenty of times and I’ve never not been able to do what I wanted to do with the office itself. I’ve painted it whatever colors I wanted, decorated it however I wanted (meaning I let the women decorate it), put alarms on the doors, drilled holes for wires, install new lighting, etc. etc. The only thing we could not control was the rest of the building…and we even had a little say so over that when we became the largest tenant. All for a fraction (1/8 to be close to exact) of what our monthly mortgage payments would have been. We got to use that money for a lot cooler things, like ping pong tables and candy.
Buying a building is not just a question about finances but also a question about leveraging skills and time. Getting into commercial real estate should not be done lightly. It requires time to learn what is needed to make good decisions and to run the facillity. You’ve now added maintance, cleaning, etc to your list of jobs. You now have the equivelant of 2 businesses, your primary business and your realestate busienss. Do you rent out part of the space and become a landloard. More contracts and work… is this a good use of time and energy? Now you need an emergency fund for the repairs and maintence.
Does it actually add to the business or take you away from it? I think a better question is what is your core compentence and can this fit in or is it better to keep it outsourced. Financial questions are good, but seem to miss a deeper question.
@Tim You said it!
I could literally write the book on this! I have purchased “well” -and then “not so well”. I have purchased property with cash – and via the avenue of debt. I have purchased land – and then I have purchased OLD (very, very old) commercial rental property. I have purchased commercial and residential. The bottom line is that there is MUCH more involved than what a person would originally think. The first building I purchased was a money pit – but I thought at the time it was so “smart” to purchase and I would “save” so much money instead of renting. How many times I thought after that – why didn’t I just keep renting? And then I have rented for 3 years with no problems with building and thought “I should have purchased this building!” So, the purchase of a commercial building is NOT to be taken lightly. Prayer, prayer, prayer and wise counsel.
I’ve worked in places that required renting storage for files, places that the owner had to store things at home, places that truly were a “one-butt counter” – the customers didn’t hurt because of any of these things, and we employees lived to tell about it.And, I see that you mentioned that you rent “a portion of the building” – perhaps you could rent another “portion” to increase your size without going into debt.
I’ve never had to buy commercial, nor do I forsee it in the near future, but this is great advice. I can think of a lot of businesses that have get into a new location (by building, moving, or expanding), and they don’t last. I don’t know if they bought or rented, but it definitely shows that great care and planning are needed.
I’m currently renting a 400 soft building for $450/ mo. We’re moving from Mi to Az as soon as our house sells here. We are in the process of buying a small house in Az this month (couldn’t pass up the deal). I’m wondering why it would be a bad idea to buy a commercial building when we move. I will need much more space for the business as I have a lot of inventory in our basement and won’t have room at the new house. I have seen buildings that are 2000+ sq ft where the mortgage would be barely more than I pay in rent now. I could see maybe renting for a year but after that it just seems like a waste of money. At least I would have something besides canceled checks 10 years from now. I don’t see outgrowing that size building for quite some time so that’s not an issue. Just looking for some thoughts. Thanks!
I think you are right about keeping your costs down until you know you can afford to buy a piece of commercial property. As you stated many people jump the gun and end up in some precarious situations.