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 an office or industrial warehouse or commercial property that their business occupies rather than to lease.
Ownership can offer many benefits over leasing. With each mortgage payment, you‘ll build equity in the property. That equity may be increased if the property value appreciates. And as owner you control your building, deciding such issues as from what capital improvements to undertake. Operating costs are often also reduced as an owner/occupier since there are typically reduced external management fees and you decide on maintenance and upgrade schedules. You also won’t be subject to rent hikes on lease renewals!
There are of course also disadvantages to ownership. Purchasing your commercial property may reduce working capital which might be otherwise used to expand your business. Buying a commercial property generally requires a cash down payment of 30 to 40 % of the property to obtain financing.
Also consider that there may be significant renovations costs required which are required 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 another 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 take over their space. 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 to occupy. This is true both for office and industrial type buildings in the Toronto area. Its is therefore important to do your homework upfront to become “Real Estate Ready”. This means establishing your criteria for purchasing and becoming educated on market pricing. You are also well advised to consult your lawyer and accountant to make sure you structure your investment to meet your tax and investment goals.
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, a non-cash expenses that can reduce taxes on business profits, as well as mortgage interest. If the entrepreneur purchases the commercial property in his or her own name, the business can pay rent to the owner and the rental payments reduce the business taxable income. Be sure to talk to your accountant before making any tax related decisions.
Before you purchase a commercial property 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. See the link to a mortgage calculator https://tools.td.com/mortgage-payment-calculator/
Once these things are done you will be what we like to call “real estate ready” and you will be in a better position to act quickly, confidently and with minimal conditions if the commercial real estate that you are looking for suddenly becomes available.
Finally consider your exit strategy. Try to make sure that your use for the property fits in with the rest of the commercial properties in the area so that when the time comes to sell, it will sell easily and hopefully appreciated in value over time.