Small business owners are just like the rest of us: renting vs. buying is a crucial consideration for long-term financial health.
The problem, says founder of AZ Accounting Firm Andrew Zakharia, is that business owners aren’t even asking the question in the first place.
Less than 1 per cent of Zakharia’s hundreds of clients own an office location. But Zakharia does. And he says it’s a major missed opportunity.
Toronto Storeys spoke with Zakharia about owners buying their own office, retail or hospitality space.
If your business can't move -- try to buy first
When someone is starting a business, one of their first steps is looking for a space to lease.
But if your business depends on one long-term location to build up loyal customers in the community, Zakharia says you should start with a purchase. This especially applies to bars and restaurants, which may need to invest in building a kitchen.
If you stay in one place for five years and then decide to purchase your property, the landlord might not be willing to sell. And moving is expensive — as well as risking the loss of local, regular customers.
“Your favourite restaurant, your favourite pizza place, if that moves blocks away, that can completely transform the business,” Zakharia says. “If you’re a business that has to stay at one location, it’s better to think about [buying your property] immediately.”
If your business is professional services -- buy when you can
“If you’re a service or marketing firm — or me, as an accountant — moving geographically really doesn’t matter,” Zakharia says. “And a lot of times, you move when there’s growth.”
For example, if your consultant firm grows from three employees to fifteen, you will be upgrading offices anyway. That’s an ideal time to buy, Zakharia says.
“It’s something you want to be considering annually, looking at your numbers,” he says. “Ask yourself: ‘Is it viable for me to buy?’”
Zakharia reached that point in his own accounting business. He had been renting an office from Regus before he discovered that carrying a mortgage would be cheaper.
“Usually the mortgage and associated costs will be less than rent,” he says.
There are government resources available to help
“It’s actually a lot easier to buy than people think, but they don’t consider it,” Zakharia says. “Through the Canadian small business loan, the government will finance up to 90 per cent of assets that you need to buy your business.”
There’s also the Business Development Bank of Canada (BDC), which has lending opportunities for a business that has existed for a couple years.
“The BDC will let you borrow up to 100 per cent — or even more than 100 per cent — of the purchase price,” Zakharia says. “If the property is $1 million, they might lend you $1.1 million.”
BDC is a cash-flow lender, he points out — so loans are based on your existing revenue.
“All BDC primarily cares about is: Do you generate enough money to pay the mortgage every month?” he says.
“So, you want to buy a place, and your rent is $5,000 a month and you’re still making a profit. For the mortgage, the payments are going to be $5,000 a month — but you can afford it because the rent payments were $5,000 anyway. You’ve already proven you can sustain it.”
You're paying yourself instead of paying rent
It’s expensive running a business — understandably, owners want as many tax deductions as possible.
If you have a lease, you are deducting the full cost, Zakharia says. If you are the property owner, deductions include tax, fees, insurance, maintenance and mortgage interest. But the principal mortgage balance is not tax deductible.
“Theoretically, you would have lower deductions because you can’t deduct the principal portion,” he says.
While that might sound unappealing, it’s important to remember that the principal portion is you paying yourself. But if you’re renting, you are paying the landlord — both for their short-term costs, as well as their mortgage.
“The landlord wants you to pay their whole mortgage, they want you to pay all of their expenses,” Zakharia says.
In the long-term picture, a vast amount of cash is either going to a landlord, or to yourself.
As for the assumption the landlord is responsible for repairs in the space — this is true for residential leases. In commercial leases, Zakharia points out, tenants are generally responsible for everything on the inside, from plumbing to HVAC.
There are many benefits to buying
Wealth: “You’re building equity in the property. You’re building up your assets.”
Control: “[Owning the property] gives you the ability to control your business, and the destiny of your business. As a tenant, once your lease agreement expires, you could be building something that someone else can take away from you. You build a great restaurant in a great location, then the landlord sells to the developer and you have to leave. Now you have the cost of moving and all the associated expenses.”
Leveraging power: “In addition to building worth, you can leverage that asset to borrow down the road. So, let’s say you’re there for five years and you want to renovate your existing business. You now have equity that you can leverage against borrowing from the bank to do renovations.”
Retirement: “No matter what, you’re going to have to pay rent — it’s overhead. In 20 years, when you want to retire, you’ve paid all that money to yourself and you didn’t even think about it.”
Diversifying: “You now have two businesses. Before you only had an operating business, but now you have a real estate business and an operating business. Even if you choose to close your operating business, you still have that real estate business. You can become a landlord and rent it out. You’re just diversifying and turning your one source of income into two.”