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How mu c h money c ould you s a ve b y owni ng i ns tea d of lea s in g?
M A K I N G TH E
$1M DECISION KEN TURTON - PRESIDENT
Many tenants avoid purchasing their building out of frugality - but most don’t realize how much money they could save by owning. I had lunch the other day with a good client I met back in 2003. He wanted to discuss the market and potential purchase opportunities as he would likely need more space within the next 12 months. The client was an owner-occupant and this would be his third building purchase in 8 years. Their first, in 2009, was a 5,000 square footer in the heart of midtown with 12 parking spaces. They paid $1,000,000 for it and then sunk another $500,000 worth of improvements into the building. I’m not sure how many of you remember 2009 but that was about the time many of us were considering downsizing our homes to cardboard shacks on the street and evaluating YMCA’s for their shower facilities. Nobody was lending and even fewer people were borrowing, but this particular business (a lobbying firm) was
still doing well and they had a lease that was expiring in a Class A building and the time was now or never if they were going to purchase a building. It was a difficult decision but ultimately they bought a building and improved it to a level commensurate with their Class A lease space. Even then the finished space would warrant $2.00/SF net rent plus parking valued at $100 per space. As we reflected back on the success of their business the client commented that purchasing the building was one the best decisions they ever made and over the course
of 5 years between 2009 and 2014 they had effectively saved almost $400,000 versus renting. Had they extended their lease the rate would have been $2.75 per square foot plus annual increases plus parking costs for 5,000 square feet. Over a 5 year term they would have spent about $900,000. As owners during that same period their total expenses were $625,000 including debt and operating expenses. $140,000 of this $625,000 went towards reducing their principal loan balance so really they only spent $480,000. They also benefitted from $125,000 of depreciation and $25,000 in property management fees they paid themselves. You could effectively argue this firm has spent $330,000 versus a potential $900,000 and this does not even account for the building appreciation which has been quite substantial. At the beginning of 2014 they had outgrown their 5,000 SF building and now wanted to purchase a 12 – 15,000 SF building with a tenant or two that would provide space for additional growth. They executed that purchase and by the end of this year they will have saved another $500,000. Ironically they are basically acquiring real estate properties and building their investment portfolio with the money they would have otherwise spent leasing. The client thanked me for helping him make that first difficult decision at a difficult time. We guided him through the finance process as well the complicated architectural, permit and improvement process. On time and on budget. It was personally rewarding to hear his words but it was not the first time I had heard them. I have helped dozens of other owner occupants do the same thing over the years and all of them experienced similar results. I purchased my first building in 2014. I bought a 6,000 sf building of which I occupied 3,000 feet and had three 1,000 SF tenants. That decision helped me save over $250,000 in three years. Next year we will move our growing company to 5,000 SF in a new building. If owning your own building and saving a significant amount of money is interesting to you, I would encourage you to give us a call. There are many various financing mechanisms that make this option feasible for just about anyone with a viable business. We will be happy to discuss the economics and processes and determine if it’s right for you.
FLOWCHART:
SHOULD YOU RENT OR OWN YOUR BUILDING? S TA RT H E R E
No
Own a business?
Yes
Like saving money?
Yes
No
Yes
Ha! Draining the accounts before the divorce?
Long or short term?
Long
Own
Short
Rent
Oh. This is awkward.
“Purchasing my own building was truly one of, if not, the best business decisions I ever made. It literally made me an extra $1,000,000.” - Doug Stanley Owner, Levin’s Auto Supply
Turton Commercial’s owner-occupied building at 2409 L Street has been designed to match the company culture.