Better to own the Business or Real Estate?

Question

Curious to hear what everyone thinks. If you had to choose between owning a business and renting the space vs. owning the building and renting to the business, which would you choose?

Greg Dickerson · Answer

It depends on the numbers and the business.You need to consider the overall costs of ownership vs leasing and the return on the cash invested in the property vs put to use in other properties or assets. If the space is priced right and the business is good in the building for the long term it may make sense. If you think you will outgrow the space or exit the business you want to make sure you can continue to rent the space.

Joe Villeneuve · Answer

Own the building and rent the space (part of it) and have the cash flow from the rents pay for my space in the building.

Michael Ablan · Answer

@Nick Rutkowski -  Owning the space and renting the business (for me at this time in my life).  Flexibility to be transient is very important to me, and owning brick and mortar businesses can rob that from you fairly quickly

Scott Mac · Answer

Although I'm a very entrepreneurial person, personally I have no passion for owning a traditional business myself.

My passion is real estate 100%, so I'd ALWAYS choose to own the real estate and rent it out (which is a business too).

But if you think owning a business "Fits" YOU, then doing it might be good for YOU.

America needs more businesses to employ people (so they can have a nicer life) and to make the owners RICH!

Anthony Dooley · Answer

If there is a chance that the business will outgrow the location or if future technology would make the building unecessary, then buying the building may not be wise. Renting the space allows you the freedom to move if needed.

Frank Chin · Answer

Depends on the type of business.

My father had a retail type business, a laundry, and if a landlord kicks him out, he would have lost what he put into it, as he bought the business, so he wound up buying the building, so he could keep his business. Back then, before laundromats, before wash and wear clothes, people drop off their laundry down the street on their way home from work, not drive a long distance to drop it off.

He later closed the business, and rented out the stores. A neighborhood doctor inquired about buying the property as his landlord is considering buying the property where his office is, and he had to relocate. If he didn't relocate within a few blocks, he'll lose his clientele, as this in in a congested area in NYC, people don't jump into their cars and drive 30 minutes to visit a doctor. They go to ones in the neighborhood.

Talking about landlords taking over, my dad's favorite fish market was kicked out by his landlord, and they been in the business at the same location for 50 years then, in the 3rd generation. They realized someday, the day might come, and purchased a building with a storefront across the street some 10 years before, and moved when it happened. They also built up a business selling to restaurants. So they planned on the day they'll be out on the streets when they lose the store.

These are examples of various businesses where if you don't own the building, or have the right of first refusal to buy when you lease, you can get kicked out onto the streets and lose the business.

Nick Rutkowski · Answer

@Greg Dickerson

Thank you Greg, you’re always so insightful!

Cameron Tope · Answer

@Nick Rutkowski I think @Greg Dickerson said it all!

Frank Chin · Answer

Good points.

Having been a real estate investor since the early 80's, then started a business, checked up various businesses and having bought one, operated it for several years, I definitely say that real estate is much better.

I started a computer and software consulting business. I checked out purchasing laundromats, dry cleaners, small restaurants. I finally bought a 35 year old car repair business, excellent local reputation, that I can operate absentee, that makes enough to pay a manager, staff, and does not have the crazy hours of a restaurant business. Even though the cash flow is better than real estate, the risk of running it is more than what I can bear, and I sold it after 6 years.

My dad was retired at the time, and I considered buying a small Chinese restaurant, takeout, and have him run it as manager, and part time if he wants to. He asks "are you going to be around?" Told him I'll be doing real estate, maybe computer consulting on the side. He said "in that case, No No No". I asked why, and he said in these small businesses, especially ones where customers pay mostly in cash, unless you're there full time, else employees would rob you blind. You at least work the front of the house, meaning dining room and cash register, and handle all purchases. Some restaurants has a manager for the kitchen, responsible for purchases, because he knows best what to buy and how much, but when you're not watching him, they make deals with suppliers, and pocket payoffs on the side.

I confirmed my dad's observations speaking with acquaintances in the restaurant business. One owner, who's there seven days a week decided to take Saturdays off when his children was 8 to 10 years old, so he'll spend a day a week with them. He hired a Saturday manager, after several months, he noticed his Saturday takeout orders, which ran over 200 to 300, is running 100 or so. He had his suspicions, so he parked nearby, disguised himself in a stakeout, and counted the number of deliveries leaving the restaurant. He did it for several weeks, the restaurant was still doing 200 to 300 takeout orders, with the Saturday manager doing most of it off the books. He decided to come back on Saturdays.

Another restaurant operator has his kitchen manager do purchases. He later found out his manager, worked out a deal where the sales manager of his supplier where they overbill, and the two guys split the difference. That's why you have to be there to count and accept deliveries, then approve payments. My favorite French restaurant in the neighborhood is super busy at night, but virtually empty lunchtimes, and I asked the owner why they bother to open for lunch. His answer "I have to be here to accept deliveries to make sure everything is correct, and since I'm here already might as well serve lunch".

I said I bought a car service business, operated it for six years, and had a manager and employees, enough to do it absentee. We also do "state auto inspections" where we charge is $35. Simple, right? and you make money if the car needs repairs to pass. Then I heard through the grapevine that one of my guys charge the $35, then charge the customer $100 to pass the inspection if they fail it. Word in the neighborhood is you bring the car to our place to pass. What I learn is if the state finds out about it, I'll be imposed a severe fine, and have the state license to operate revoked, besides criminal prosecution. Wow.

Can these problems be prevented? My dad who's been in the restaurant business says that the restaurant must be of a certain size, according him at least 30 waiters, that many in the kitchen, to have enough heft to develop enough checks and balances to operate absentee. A good friend of his, who retired from the restaurant business, but whose son still owns some, went back to work to help his son. He didn't want to be a waiter, cook, maître dee. So he sits outside the kitchen, get a ticket for every dish taken out and confirms it, and at closing time, confirms customers paid for the same number of dishes out front that came out of the kitchen. This way, you'll also find out if waiters collect on all meals served, or they pocket the money.

So I've looked into various businesses, and real estate can operate passively, and a relatively small investment. Back then, I would have to put in several hundred thousand, up to a million or more to get into a restaurant that has a staff of over 50, open long hours, seven days a week to run absentee. As one of my recent tenant who complains about his high rent, says, "you even make money while sleeping". I laugh when I think about it and agree. With some of these active businesses, you can lose money even when you're wide awake.

Joel Owens · Answer

There is a different level of ACTIVE versus PASSIVE these days with businesses. In an up economy lots of people want to start up new businesses. They usually have no idea how to run a business so only compete on price to try and win customers. That can put some pressure on existing businesses for varying periods of time. In the food business for example to achieve 20% profit margin was not out of the realm of possibility. Now that usually happens at only the greatest of locations and the rest of the franchisees are making maybe 10% profit. About 80% to 85% of all business are small businesses with revenues under 1 million annually.

These tend to be owner operators that work long hours and constantly dealing with employees so a  very active business. Having been on both sides I would much rather own the real estate and have the business owners pay me the rent. That is a much more passive investment for the dollars being produced for profit. Of course that usually takes some cash and scale to achieve.

It's all about where you are currently and where you want to go and what kind of life you want to have. We all like to live differently with our own version of happiness. Views on life, wealth, family, and time can often change at any given point in our life cycle.

Better to own the Business or Real Estate?

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