If you want to look for negative factors of investing in commercial real estate, it’s usually large cash outlays and potential vacancy. When you are purchasing for your practice, these two factors are virtually eliminated.

When buying for your own use, initial down payments can be as low as ten to fifteen percent of the purchase price. The most favored loan for commercial lenders is office users buying for their business. Just like residential lenders give the best rates and lowest down payments to owner occupants for their primary residence, commercial lenders favor user loans over non-user or investment loans. To improve your returns even more, you can use the equity in your home or stocks and sometimes reduce cash outlays to zero.

As far as potential vacancy, you might be the only tenant or a major tenant, so no worries there. Even if you are not ready to move or expand now, you can save by reducing your future overhead.

When helping buyers purchase office space, one of our favorite advantages is principal reduction. When you own your own space, each month part of your normal occupancy cost to operate your business is reducing the principal balance of your mortgage. This can be significant. Many times when we sell property, the seller will tell us they only bought to control cost or to keep from having to move. The profits from selling are surprisingly a windfall they didn’t even expect. Many businesses are paying off their office mortgages in only ten to fifteen years. When they retire or sell their business the building provides a large sum of cash, or cash flow.

Inflation can work for you or against you. Purchasing office space makes it work for you. Rents over time tend to increase. If you purchase, your landlord can’t raise your rent each year. The cost to build or buy real estate also increases over time. So if you purchase, your building value increases every year.

Another inflation benefit is the positive leverage of financing your office space. For example, if you get a 7% return on $100,000 that’s $7,000. If you use $100,000 to buy a $1,000,000 office, even at only 2.5% inflation, that’s $25,000. It’s the power of positive leverage and inflation.

There are also multiple tax advantages your accountant can confirm when you purchase your office space. You can purchase the property as a personal asset and lease the office to your practice. The practice writes off the lease and you can shelter some income through depreciation of a non-passive personally owned and managed property. Another tax savings involves capital gains vs. ordinary income. Capital gains on sales of real estate are capped at 15% for IRS reporting. Since your tax bracket probably far exceeds the 15% capital gains rate, capital gains income from real estate profit is a good venue for reducing your tax liability. The rate for depreciation recapture is 25%, again probably less than your tax bracket. You benefit from using the depreciation tax savings until you sell and still only pay at 25% rather than your ordinary tax rate.

Should your business need to expand beyond the capacity of your building, or should you need to relocate, you have several options. Call your Lynx real estate advisor to; lease the space and build wealth through investment real estate, refinance for expansion, or utilize the 1031 Starker exchange tax code to trade tax deferred into replacement property.

We hope this information has given you a clearer idea of the real estate investment options open to you. If you have any further questions or would like to discuss strategies that will help you reach your financial goals, let us take you there! Contact us a (404) 477-2044 or email info@lynxre.com.