Short video by Donna Genie advising studio owners on whether to buy their business location versus renting. Covers financial prerequisites (down payment, financing, cash flow), logistical and market risks (moving costs, customer retention, tenant availability), COVID-driven demand changes, interest rate/inflation considerations, and local infrastructure risks. Concludes that the decision requires case-by-case discussion.
Foreign. We've all heard when grandpa says that renting is just throwing your money away, you should pay that money into the purchase of something that you'll own for the long term. But is that a good idea for your business? Many studio owners come to me and say, hey, I have the opportunity to buy a location of my own. Should I do that instead of renting? Well, there are a lot of factors that go into that decision and that's where we help guide them along the way. Let's talk about a few of those. Do you have the ability to buy where you're currently at or will you need to move? If you'll need to move, consider the costs of moving and what it will take to get your customer base back up. There will be a temporary dip there. Maybe it'll be far better in the long run. But can you survive that short run? And will your customers follow you to a new location? It's a very hard thing. It's like herding cats sometimes. So those are considerations. The other consideration is how much will it cost? So if you purchase the building, what would your payment look like in comparison to your rent? Would you have extra space that you could rent out to someone else that might help you defer some of the cash flow and make that payment each month? Maybe. Maybe that could be a good idea. If your business is in a solid position, it's been around a while and you have the stability to be able to buy a business. The other thing you need to consider is the cash flow. You'll need to have a down payment, usually about 10 or 20% on commercial property to buy that location. Now maybe you can arrange some seller financing. If you have an owner who you're where you're currently at, who wants to sell, but in a general sense, figure on 20% for the down payment of that property. Do you have that or can you get that? Do you have the ability to get financing? Again, maybe that seller financing can help out, but in most cases you're going to have to go to a bank. Do you have solid enough financial statements and are you showing it on your tax returns to be able to make the ability to for the bank to lend you that money and be able to pay it back. That may take some pre planning, by the way. So if you are in a case where you are writing off everything possible, maybe you'll need to adjust your financial picture a bit to make sure that you can qualify for a loan. Now, a couple other downsides that we didn't always think about that we should now Covid changed the world on how we work and how people move around place to place. People were very mobile. But there are a lot of cases where people don't go to retail locations like they used to. Will they still go if you're in a different location? I have a friend who leased an office space that was the perfect office space. It was an entire floor of a building. He had a team of about 30 people who worked in his business and their lease started in 2019 for 10 years. Well, let's look at the picture he has today. His office is empty. He has one person who is manning the office, answering the phones, getting the mail, taking package deliveries if there are any. But all the people work from home. They're all remote working. They prefer it that way. And the world has changed in that way. They'll probably never go back to that office. But he's stuck with a 10 year lease. He's riding it out and there may not be a case where he can get out of it. So think about weird situations. What could cause that deal to not work? If you were to close your business or have to close your business, whether it be health concerns or you had to move or something, what would happen? Could you rent it out to someone else? Can you sustain the time frame where you'd have to find a renter? Because there is a lot of property for rent right now. So it's a rough situation to find a good tenant. Another thing is that inflation has caused interest rates to go up wildly. So now might not be the best time. You might need to wait until the price will be more affordable because of interest rates now. Also, we may have a recession type thing coming and the real estate market may take a dip. That could be an opportunity if you can wait until that dip and you can still afford the payment to watch for it. And lastly, no one really has a crystal ball. So take a look at what's going on in that location. Is there a possibility that location could have an issue? Roads and infrastructure are a big one. Could the city come in and expand your road and make it so that no one can turn off it? Or put a barrier down the middle of the road so no one can make a turn into your location? Weird things like that. Could they build a building in front of yours where nobody will see you? All sorts of considerations when buying a building. So going back to that first question when a studio owner asked me, should I buy my location? There are a lot of things to consider. So it's not just super simple answer. We need to have a discussion about that and really see how it would work for that business. Please follow us on Facebook and Instagram. Please make sure to check out our blog and our website link below. Subscribe to our YouTube channel and hit the bell to be notified when we post. You can email me@donnapyopaccounting.com SA.
