Guide to Real Estate in Rhode Island
Do you own it, or does it own you?
Real estate investing takes a little bit of luck and a whole lot of skill. I remember my first real estate transaction back in 1999. I purchased a multi-family home as an investment property. I didn’t realize at the time just how lucky I was – buying when the market was low. That investment paid off several years later when I sold the property for an 80% gain. The feeling of making a great real estate investment on my first attempt was empowering. I felt like the Donald Trump of Cranston, a real estate mogul and investment connoisseur. Little did I know, that my first experience with real estate was much more luck than it was skill.
In 2004, shortly after I sold my rental property, I was starting my new business. At the time I had no staff and was in search of my first clients. What made sense was to set up a home-based office for the time being, or rent a small office for myself with potential to add a few part-time staff. Instead, I thought to myself, what would a savvy real estate investor do? Of course! I should buy a property to run my company out of. Being my own boss and owning my office put me in complete control of my surroundings. But just what exactly did I sign myself up for?
There are obvious benefits to owning your own office space. There is great pride in property ownership, there are substantial business write-offs for tax purposes, and there is the potential to ultimately sell your property for a profit down the road.
At the time, I thought that growing a profitable company while also making smart real estate decisions was the ultimate way to get ahead. What I wasn’t considering is that owning property is also a business, one which we have very little control over once we make the purchase. Here are a few things to consider when deciding if renting or owning is right for your business.
Financing – Typically, commercial loans require a larger deposit and higher interest rates than traditional residential mortgages, making them more expensive.
Cash Flow – With a larger deposit often required, how will this affect your business cash flow? We frequently hear the expression “cash flow is king,” and it’s true. We never want to jeopardize our ability to run our company properly by making investments that tie up our cash on hand.
Taxes – When determining how much our mortgage will cost, we also need to factor in the cost of taxes. In most cases, that will add up to several thousands of dollars per year.
Repairs – Maintaining a property can often have hidden, unexpected expenses. My office building was built in 1950 so it had the original heating system, old windows and an old roof. When it was time to renew my commercial insurance policy, my insurance company required a roof replacement. $6,500 later I was able to renew my policy.
Utilities – When you’re renting a space, oftentimes some utilities are included and others are shared, helping to reduce the cost. When you own the building, you’re responsible for it all.
Space Limitations – About 4 years after I started my company, I was up to 13 employees and looking to hire. We had maximized the space at the property I owned. Where would I put employee number 14? We looked at renting a second location, but in the end, we decided to reconfigure the office we had. Running out of space is definitely a concern when you’re locked into a long-term mortgage.
And of course, the most important thing to consider is your own sanity.Owning a business can be stressful enough. Give careful consideration to your reasons for wanting to buy commercial real estate for your office location. Weigh all the pros and cons and in the end, make the decision that makes the most short-term and long-term financial sense.
For me, I’m happy where we are now, renting our office with free air conditioning in the hot summer months.
