Deciding whether to purchase a building for your restaurant business is a significant milestone that requires careful consideration. While owning your own space can bring stability and long-term benefits, it also comes with its own set of challenges. In this article, we'll explore the pros and cons of purchasing a building for your restaurant.
Pros of Purchasing a Building:
Stability: Owning a building provides stability and a sense of permanence for your restaurant. Instead of dealing with lease renewals and rent increases, you have control over your space for the long term.
Equity Building: Purchasing a building allows you to build equity over time. As you make mortgage payments, you're investing in an asset that can appreciate in value while paying down the mortgage principal, leading to financial gains down the road.
Reduced Sunk Costs: When you invest money and time in renovating a leased commercial space, all those enhancements and improvements become the property of the building owner. However, if you own the building, you retain the full benefit of those investments, as they contribute to the value of your property. This is especially true for restaurants where there are often significant improvements to be made.
Customization and Branding: Ownership gives you the freedom to customize the space to suit your business needs and reflect your brand identity. This can enhance your company's image and create a unique, tailored environment.
Tax Benefits: There are potential tax advantages associated with owning commercial property. Mortgage interest, property taxes, and certain expenses related to the maintenance and improvement of the property may be deductible. If you are a non-profit, building ownership has increased tax benefits as you can often apply to pay no property taxes.
Potential Rental Income: If your business outgrows the space or you relocate, you have the option to lease or sell the property, generating additional income or a return on your investment.
SBA Loans: Small Business Association loans are available to those that will occupy at least 51% of the building for their business. These loans often allow businesses to get more favorable loan terms, less money down and better rates, than an investor in the same building. I will dive deeper into SBA loans in a future article.
Cons of Purchasing a Building:
Significant Initial Investment: The process of acquiring a commercial property comes with notable upfront expenses. These include the down payment, typically ranging from 20% to 35% of the property's purchase price for a conventional loan, along with closing costs and potential renovation expenses. In contrast to leasing, where landlords often offer improvement allowances and several months of free rent to assist businesses in their initial setup, owning a building places the burden of these initial costs squarely on the property owner. Additionally, mortgage companies typically do not defer the first payment, meaning you may be making mortgage payments before your business starts generating income. This scenario can strain your immediate cash flow, leaving you with less capital to invest in your business during its crucial early stages.
Volatility of Commercial Loans: Most commercial real estate loans have a variable interest rate or a short-term maturity, this puts more risk on the borrower as increases in interest rates or challenging refinancing conditions may lead to increased costs for your business. Economic changes or shifts in the business's financial health may impact the ability to refinance on favorable terms.
Limited Flexibility: Owning a building ties you to a specific location, reducing your flexibility to adapt to changing business needs or market conditions. Relocating can be more challenging and time-consuming.
Maintenance Obligations: While most commercial leases transfer maintenance costs to tenants, owning a building means you cannot amortize these expenses over the term of your lease and instead you may need to make lump sum payments. Furthermore, the responsibility for significant capital improvements, such as installing a new roof, paving the parking lot, or undertaking other major expenses that extend the building's useful life – typically covered by the landlord – falls squarely on your shoulders.
Market Volatility: The real estate market can be subject to fluctuations. Economic downturns or changes in the local market can impact the value of your property, affecting your overall investment.
Lack of Liquidity: Real estate is not as liquid as other forms of investment. Selling a property may take time, especially if the market is slow or if the property is highly specialized.
The decision to purchase a building for your restaurant involves weighing the pros and cons to determine what aligns best with your long-term goals. SBA loans can be a valuable tool in facilitating property acquisition, offering financial support and favorable terms. Careful consideration, thorough research, and consultation with financial and real estate professionals are crucial steps in making an informed decision that sets the foundation for your business's future success.
If you are thinking about purchasing a restaurant building in the Denver or Boulder, Colorado area please reach out to me. For over a decade I have been assisting business owners and restaurateurs to make their culinary dreams a reality. I would love to help you as well.