BENEFITS OF BEING AN OWNER OPERATOR
I have been around the business of shopping center management and commercial real estate investing since I was a boy. My father was a career pharmacist in Memphis, Tennessee, but he was a savvy investor. Some would say he had the Midas touch. During the days of compounding dermatological ointments with his mortar and pestle (he was old school), he would be on the phones listening to salespeople like me propose Single Tenant Net Lease building sales to him. He was on the phone allllll day.
The first building he purchased was his own pharmacy. He knew that owner operators get benefits that lessors do not receive. When you own your own space, you will build equity over time. Eventually, you will be able to use this equity as collateral to expand your business, buy additional real estate, fix property issues, or even fund your retirement. You will also have tax benefits, and use annual depreciation deductions on your property.
Per Links Financial, leasing is a safe option with minimal barriers to entry, but it may also be wasteful. If you can afford to make a rent payment now, then you can definitely afford to make a mortgage payment. Obtaining business real estate financing may seem daunting and, yes, as with any real estate purchase a down payment will be required; but owning commercial real estate is much more affordable than you think. And don’t forget about depreciation, that theoretical, beautiful, profit saving accounting concept.
It also creates additional income and opens up tax advantages for you – the business owner. As David Cameron, manager of business banking at City National Bank, put it, “buying commercial real estate is an excellent way for small business owners to create an independent income stream for themselves and accumulate wealth apart from their business operations.”
Per Investopedia, the term depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation represents how much of an asset's value has been used. It allows companies to earn revenue from the assets they own by paying for them over a certain period of time. Amortization-ish.
He took advantage of this to the fullest extent of the tax law and it didn’t stop there. Eventually he did borrow against his own building / business and purchased additional strip shopping centers. He was a buy and hold kind of guy. He loved pharmacy and his customers, but he enjoyed the art of the deal, more.
As the phone would ring at the dinner table (land line of course). He would consider the different options from the salespeople (like me). He would eventually build a 1,000 SF addition to his pharmacy. Welcome to being a landlord! And he was a great landlord. He taught me to offer leasing rates at or just below market. If the tenant left, it wouldn’t be because of landlord greed.
He also put me to work as a kid picking up cigarette butts in the parking lot. He gave me trash bags and gloves, and put me on the roof to clean leaves off the top. What was aggravating is that the shedding trees are on the neighbor’s property; Argggh. Little did I know he was prepping me to be both a good landlord and a good agent, giving me insight to all aspects of both owning a property, and leasing one.
He educated me on the importance of property maintenance. Spend the money on proper materials, skilled and talented and (insured) labor, and keep the building watertight. Water is the source of life, but it can wreak havoc on a man-made building. New roofs are expensive!
Yes, I still own the building (it’s not a pharmacy anymore), and yes, I pass the clean-up expenses down to the Tenant as part of the Triple Net Expenses. Having this insight has made me a better owner, property manager and broker. If you’d like more information, or to see first hand, how this has helped me as a broker/agent for my clients, please do not hesitate to reach out.
David Kirsch of Commercial Brokers International can be reached at david@cbi-commercial.com, 310-943-8537, and @kirsch_cre.