Question

Many small business owners have found it financially advantageous to purchase their own building. As one owner remarked upon his retirement, “We did well with the business, but we made our real money by buying the building.” Explain why this might be so.

Answer 1

There are three reasons why a small business owner might want to own the building in which they operate. First, the cost of moving around is expensive. Some small business might need large equipment to operate and completing a move might take months. This would interrupt the flow of the business and put a dent in profits. FlexTime is a good example.

FlexTime, a gym has an array of workout machines that would be impractical to move over night. Most all those machines need to be taken apart and reassembled which is costly. The second reason is that historically, the price of commercial real estate has gone up. Which means while the owner is paying off his mortgage the value of the building will be increasing. Finally there is very little commercial real estate being developed. Due to this fact, vacancy rates have dropped and rents are rising. Very little new construction has been completed, and what has been built is almost all owner-occupied or build-to-suit. Almost no speculative real estate has been constructed this past year. Thus when the economy improves, rents will rise immediately