It’s been a fun week. I did some laundry, got a haircut, and, oh yeah, bought a commercial building. Before you think I’ve lost my mind, it really wasn’t that big of a deal. I’ve owned half of the commercial building that holds my optometry practice for almost ten years, and this was just the other half of the purchase. Commercial real estate is a bit different that residential. It has pluses and minuses, but it makes sense if you are your own tenant.
Keeping the Tax Man Away
One thing I didn’t really understand or ever think about before owning a brick and mortar business was that you can own your own building and still pay yourself rent. It is a good way to take income out of the business without having it taxed as part of your salary. In reality, smart business owners would like their net income to be zero or even show a loss.
That doesn’t mean you aren’t making money. It just means that you are running as many expenses as you can through the business so that it helps with income taxes. For example, I use my cell phone to take emergency after hours calls, so that expense goes through the business. When we owned a satellite office, a percentage of my pay came from mileage to and from that office. You can also run some of your vehicle expenses through a business. We hired my daughter as a model for an advertising campaign. It’s important to have a good accountant to make sure you report expenses and income accordingly, but why give Uncle Sam more tax money than you have to? The government has proven time and time again that they are not using our tax dollars to anyone’s full advantage.
Seller Financing a Real Estate Purchase
Back to the building sale, I offered to buy the other half a few years ago, but the owner wasn’t ready to sell. He changed his mind recently, and we signed the intent to purchase earlier in the week. We will close in mid-December. Just like with the first sale, he will be seller financing the purchase, so there are minimal closing costs, and no lenders or credit reports needed. I feel like his interest rate of 4.74% was generous, as bank rates would be at least a point higher.
Seller finance is how I’ve been able to buy my business and building, and how I hope to sell the practice at the end of the year. It wouldn’t work for everyone, but at this point the seller and I have been partners in some form for over a decade, and he knows I’m a good bet. He is able to offer a sale price somewhat below market value because he will also make money on interest. If I do default, he takes back the property, but it would take something catastrophic for that to happen.
Six Years and the Title is Mine
One downside or upside to seller finance is that the terms are usually based on whatever the seller wants. For this purchase, he wanted a six year term. I had two years left before paying off the first half, so that balance will be rolled into this loan. The negative is that the payment is pretty high, and I am breaking my own rule about positive cash flow for the next few years. The rent will cover the loan payments, but the taxes, insurance and any repairs will put me in the negative.
The upside to this is that I will own this building outright in six short years. You really couldn’t pick a better location for a commercial building. There is tons of parking. There are other doctor’s offices nearby, and the lot is just really pretty. The current rent is right around $32oo per month, and regardless of whether my business sale goes through or not, the tenant (our optometry practice) has been there since 1941, so I think it’s a safe bet that it stays rented. I’m pretty happy about that.
Does this mean I want to buy more commercial property? No way! I think it can be a good investment, but residential rentals are a safer bet in our area. We are still on the lookout for the next one, and will hopefully be able to jump when it comes along. Obviously, I ran the numbers backward and forward for this purchase, and it made perfect sense to move on the deal quickly. If you can get to the point where you have no consumer debt and aren’t broke, it gives you so many more options. Maybe you don’t want a rental property empire, but whatever your goals are, it’s so much easier to make them happen if you are in good financial shape.
What is your take on commercial property? Would you ever consider seller finance?