Why you should consider purchasing the building where you run your HVAC construction business
Many contractors worry about their financial welfare in retirement. This is of particular concern to many small- and medium-sized sheet metal works contractors who don’t have much in the way of a pension plan or retirement savings.
There is one solution that is often overlooked and doesn’t require you to make ongoing savings and that is to own your own building. Instead of paying monthly rent, money is going to pay down the mortgage with the intent of owning a building debt-free on retirement. With a little foresight, you can make this happen.
Over time, the value of commercial property usually rises — maybe not as fast as residential property, but it doesn’t drop as dramatically as residential housing when the market craters. Look at your business premises and do the calculation over a 15-year period: Would you be better off renting or buying the premises? In retrospect, few people say that that they made a bad decision buying a building.
Look at the value of the building you currently occupy and determine what its value is today compared with 15 years ago. Don’t look at this as real estate flipping; this is a long-term investment and should be part of your retirement strategy.
There are two elements that might stop you from buying your own building. If certain parameters are met you should certainly consider buying. Conversely, if these parameters are not met don’t even go over the numbers.
You are going to need a deposit for buying a building. A 25 percent deposit would be desirable. It would make it easy to get the balance of the money as a mortgage at a very competitive interest rate and the payments should not be onerous. Your overall expenses should not be higher than your current ones.
Space and location
If the size of the space you are buying and the location are likely to meet your needs for at least 10 years then buying should be considered. If the answer to this question is not “yes,” then buying may well be the wrong decision. If expansion is on the horizon and you could afford to buy two bays and rent one, then that would protect you for the long term.
All the other elements of the decision making can be made after you make these initial choices.
If you decide to look further into buying here are some elements to consider.
When you rent the premises, the landlord often provides an amount to cover needed leasehold improvements. He or she will recover that cost in the initial lease period by building it into the rental rate. Once the initial lease period is over, the lease rate should drop or the landlord should provide a further incentive, such as more leasehold improvements to compensate. Another point to watch for is that at the end of the lease the landlord may have the right to force you to return the building to its previous condition. So if you have added some heavy electrical systems or built-in racking, you may have to dismantle them.
When you own the building many of these items are not a concern. You are more willing to spend on the improvements knowing that they are yours. Also you will be more inclined to spend money on streamlining the production process and materials handling if it is your own building.
If you buy at a new location you will have to move. The cost of moving a plumbing or HVAC construction business is not too onerous, but moving a sheet metal forming and ductwork fabrication shop or manufacturing plant would be expensive. Not only will you spend time finding another building and have the physical cost of dismantling, transporting and setting up but you will also have to factor in the cost of the loss of productivity. These are not huge costs but do include them in your analysis.
These number-crunching exercises need to be done to determine if a purchase is better than a lease. This means identifying and comparing the various elements of cost between what the landlord pays and what you would have to pay if you were your own landlord.
Watch out for the major issues that would now become your responsibility, these include the condition of the roof and other exterior costs.
Picture the neighborhood in 10 to 15 years. Do you see it as being more or less desirable in the future? If you are in an area that is growing then you have a lot more security for the future of your investment.
If you decide to move, locate close to a major supplier and the freeway.
You should never buy your building in your operating company. You should set up a holding company and it should own the building. Talk to your accountant about the pros and cons of the holding company owning the shares of your operating company. Maybe you would put some of your equipment in the holding company. Be careful of the tax consequences.
When you retire, if prices are right and you don’t want to be a landlord, you could sell the building and generate a capital gain. This would leave you with a nice lump sum to invest in your retirement.
Because many small HVAC market contractors don’t save much money during their business life and don’t manage to sell their businesses for a lot, this strategy can make a difference when it comes to quality of your retirement lifestyle.
Investing in your own building and paying off the mortgage so that it is free and clear on retirement is a guaranteed way of ending up with a pension fund. Act now.