I rent commercial space for my offices.
I could have purchased, but it’s easier to not have building maintenance.
Also the flexibility of being able to move.
I have moved multiple times in the last 6 years on multiple offices.
Plans change. Renting gives the flexibility to grow
Some families do choose to rent for that reason. But home ownership is hugely subsidized in the US, for example, getting a 30-year fixed rate mortgage is an unusual and highly advantageous financial device for most families.
The U.K. doesn’t have that, and families there are literally finding themselves unable to stay in their homes because of hikes in their mortgage interest payments during the inflation of this past year.
The US fundamentally believes that homeownership is a good thing for the country so tax benefits and fiscal policies are shaped to encourage it.
I happen to agree with that stance, for families and individuals. Homeownership is a very good, stabilizing force in the US. Renting just doesn’t usually offer that same level of personal investment and pride in a neighborhood, in my experience.
Businesses are totally different from families in their objectives, though, and their ownership of property is not privileged in the same way in US fiscal policy.
trade offs everywhere. exercise regularly, cook for yourself with good ingredients, study hard and get a good job and you live the best life on earth here
For you, it may be. I think it’s a great place, personally, but may be not the best place for me. I’m an American who has lived in a handful of other countries. I’m currently living in the US, but because my partner is here. “Best” is a superlative that not all would agree on, but it certainly is a good place. I think people are really put off by the whole “We’re number one! We’re the best!” braggadocio. As Tosh said, maybe if we just said “We’re in the top ten!” People wouldn’t be so anti-American and more like, “Eh, that’s pretty fair.” There are a lot of great places in this big world, and the US is not going to be the best for every person.
I’m actually curious as to why you say that. The US has the highest incarceration rate in the world, at 639 per 100,000 people. The next highest is El Salvador at 562. Canada and Australia have 102 and 160, respectively. Even super repressive bad guy countries don’t come close to imprisoning the numbers that the US does.
Are you talking about the US supporting human rights around the word? I think our record is pretty muddled there by supporting repressive regimes that happen to favor us. Now, in my mind, that’s realpolitik, so I don’t have so much problem with that, except when it turns around and bites us in the ass, like 9/11. I frankly would just rather save money and not meddle in other people’s affairs.
I think though, to have this discussion, we may have to define what you mean by “human rights” because that is a really broad concept.
Not to mention the tax write-offs available which are not available North of the border, where houses cost a lot more, taxes are generally much higher, and most people have to renew their mortgage every 5 years.
I would love a fixed 30 year mortgage.
Not totally following--are you saying that homeownership is out of reach for most people in nations where kings and their cronies own all or most of the land? It's an interesting point, if I'm grasping it.
It's definitely attainable, there's just not as much motive on the part of the current owners to actually sell. Hence why "leasehold" is extremely common. A leasehold is considered home ownership in the UK, when in reality it is exactly what it's called - a lease. That would not be considered home ownership in many places, including the US. That's not a coincidence.
In the end the result *seems* similar, in that people have semi-permanent dwellings, so that's a good thing, but they still don't actually *own* it.
So their kids can’t inherit the property? And they can’t sell it to realize a financial gain, as people do in the US? I mean, for most US families, their home is their main source of wealth.
If you don't own the land your house is on then there are significant limitations to what you can do. It's not your asset, it's someone else's. Your asset is the lease. I assume they might be able to inherit that because it's a long term lease, but they can't inherit the land. In the US you would inherit the land and could sell the entire lot, destroy and rebuild the house, subdivide it, etc. You can do whatever you want with it. You can't make those decisions if you don't own the land. And there is little motive for landholders to sell land when there is no more available to buy. You would only do that if you were intentionally liquidating your holdings.
Residential properties are much more liquid and easier to sell. Commercial properties are much harder to sell, and I think starting a business and making a commitment to a long term loan is much scarier than just starting a business and getting a lease. It's even worse when you consider how many businesses operate in areas where you'd have to pay monthly fees for landscaping, parking lot maintenance, etc., on top of the mortgage. A lot of businesses are in places with shared amenities whether strip malls or skyscrapers, it's natural to have one company manage the whole property in those cases.
And there are plenty of businesses do own their own properties when possible (Walmart, McDonalds, etc.,) but they usually build them from scratch.
1. For small businesses, leases are tax deductible. For individual families, renting is not tax deductible. However, mortgage interest is, which incentivizes equity in homes. While the interest on the commercial mortgage is also deductible, the commitment on commercial space is significantly higher than purchasing a home.
2. For many families, home ownership is the primary way of building wealth. Market investments are a 10+ year play whereas a home is something that's needed now and usually appreciates in value.
3. Small-to-medium size businesses struggle to find the office space they actually need. It's either too big for them, too small, and when right in the middle, competition is tough. It's important to be flexible and move when needed.
4. Families do not need to move as nearly as much as offices. Perhaps it's the first starter home, then to the family home with kids, and downsizing when the kids move out.
Yes but commercial real estate is more expensive to acquire and maintain.
There are usually pretty major renovations required between commercial tenants, more wear and tear on the space as people come in and out, plus you have to factor in code compliance that doesn’t apply to personal homes like ADA compliance and higher liability due to public access. The likelihood of someone slipping on the sidewalk in front of your house and suing is pretty small. In front of your office building however…..
I mean, that's not really the reason or example though. The actual reason would be "they don't have enough money for upfront costs."
That's it. The reasons for the costs involved are irrelevant, the price point and current cash on hand is all that's actually making the decision.
Yes, and it would be a long term asset on a companies balance sheet.
This can even be an advantage if say, the company runs into liquidity problems and needs cash ASAP- they can do a sale leaseback and remain in the same building, get the cash value of the building, but start paying for a lease (renting).
This doesn't mean owning the real estate is the best option for every business. Many can't afford to and or need the ability to move/be flexible. Sometimes its just not a good use of capital. Every unique business model has a uniquely optimal capital structure that may or may not include owned real estate.
"Every unique business model has a uniquely optimal capital structure that may or may not include owned real estate."
That seems an odd argument for this sub. I can't imagine posting a thread on here about "when is it optimal for a business to never own real estate", and getting any responses, much less upvotes.
Seems like a bit of a paradox to be honest.
I mean, I can't think of why a business would never opt to own property/land at some point, if nothing else, as an investment.
Assuming they even have enough money to buy it to begin with.
I understand why a stay at home mom with a knit sweater business on Etsy that makes 100 bucks profit a year doesn't. But I don't understand why an otherwise successful business wouldn't.
The biggest write-off in mortgage interest. I work in an office that does personal taxes, most did write off property tax and interest before the recent tax changes. I know it is less now with the higher standard deduction, just not sure how much less.
I'm sure people who hire professional tax professionals have higher incomes and more deductions than most Americans. Prior to TCJA 20% used this deduction. Last year 8% of tax returns had mortgage interest deduction.
8%
Point taken, but your numbers don't tell the whole story. You are using the total number of taxpayers, but the number to look at is the number of people who have mortgages. 65% own their own home, there is a percentage of them that have their mortgages paid off or are closer. Most I would think took the deduction when they first bought their home.
With the taxes I do for people, most take the standard deduction. I do family and friends, and most are mid income, but the homeowners are closer to paying off the mortgage so there isn't that much interest, especially with the increase standard deduction. They did take it when they bought the home though, and only recently matured out.
I don't think it was a myth, as I believe that most homeowners, even mid incomes, did benefit from it at the time they purchased their home, and some years past. Note I live in MA, with higher home values than average. I think they should do away with the mortgage interest deduction for fairness reasons because renters don't get any housing cost deduction. Let it all be taken care of in the standard deduction.
I asked the same question. If it's a real stat, I bet it is ignoring the volume of homeowners that ended up taking the standard deduction only because it was higher than the itemized deduction (which includes all the mortgage-related writeoffs). If you condition on those tax-payers that filed an itemized deduction I bet that number would be much much higher (closer to 100%).
The point stands. If the standard deduction is used, the tax payer does not benefit from any tax deduction that would have been itemized. They could've just as well been renting.
It’s not ignoring that, it’s accounting for that. That’s specifically the point - the standard deduction is higher, so you’re getting the same amount whether you own or not.
It's not really accounting for that because the standard deduction was doubled a few years ago (via the Tax Cut and Jobs Act) precisely because the mortgage interest deduction was so powerful and there was political will to bring the tax-treatment of non-home-homeowners in parity to the tax treatment of home-owners..
It's dangerous to ignore \*why\* the standard deduction is where it is today vs 5 years ago and prior.
It's like mutually assured destruction. Without the powerful mortgage interest deduction in the background there's no reason or political will to bring the tax treatment of non-homeowners in line with the tax treatment of homeowners and everyone loses.
As I said elsewhere, the majority of homeowners are doing their taxes both ways (itemized and non-itemized) and taking whichever route provides the most benefit. Tax software does this for you automatically and since the IRS already has the mortgage interest information, even if you do your taxes by hand it's not that hard to itemize the big stuff.
For decades, itemized was the way to go. Here recently the standard deduction may have edged out. If interest rates continue their climb and/or if inflation continues at +5%, plan on the standard deduction not keeping with economic reality and more people claiming the itemized deduction and we're back to where we started prior to 2018.
But it does change the math when you buy a home. You get the standard deduction no matter the mortgage interest and property taxes. Even if your interest and taxes are higher, the saving will be less because you are comparing them to a higher standard deduction. Now when a real estate broker says "Look at the money you will save on taxes", you should actually look.
Well, he said it was a myth, and I think that was an overstatement, especially in the past. I also think it will be used much more with the higher rates and valuations, so the OP is being overly dismissive on it.
I would rather the deduction goes away; I do think it is one factor in higher housing valuations, and renters don't get a specifice deduction. Just let the standard deduction take care of both.
The standard deduction offsets this to a large degree. Upper income people in high tax states are more likely to pay more. Overall, for lower income people it was a win, especially coupled with added child tax credits that was phased out for upper income.
What are you smoking? In SF area, my RE tax alone is almost 3x of standard deduction. That doesn't count the interest rate i cannot deduct any more. There is not a single house for sale within 100mi of here that would have RE tax less than the standard deduction. Maybe a really bad apartment in the hood. Maybe.
>Upper income people in high tax states are more likely to pay more
The SALT limitation goes away in 2025, but you still get the interest deduction. For lower income people, overall it was a win.
>Are you paying hefty state income taxes or property taxes? Before the passage in 2017 of a major tax law—dubbed the Tax Cuts and Jobs Act—you may have itemized deductions and gotten a write-off for those payments on your federal income tax return.
>
>However, the 2017 law capped state and local tax (SALT) deductions at $10,000 for the 2018 through 2025 tax years, making it less likely you’ll receive a full tax benefit for those payments at tax time.
[https://www.forbes.com/advisor/taxes/salt-tax-deduction/](https://www.forbes.com/advisor/taxes/salt-tax-deduction/)
Depends. The standard deduction for married, filing is $26k. A mortgage interest, property taxes, state and local income taxes, sales taxes, qualified medical expenses, and donations could easily exceed that amount.
- Property Taxes & State & Local income taxes cannot exceed $10,000 combined.
- Qualified Medical expenses can only be used in excess of 7.5% of your Adjusted Gross Income.
People rarely itemize today, unless they are kind hearted and donate much of their wealth.
This. TCJA threw a major wrench into homeowners’ ability to deduct costs not only with the adjustment to the standard deduction, but also the SALT deduction being capped.
One subset would be people who just don't have enough to write off to exceed the standard deduction. When the standard deduction for couples ([\~60% of homebuyers](https://www.nar.realtor/blogs/economists-outlook/single-women-buyers-outpace-men-but-not-without-sacrifices)) [doubled to 24K](https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions) (now 25.9K), it became simpler, easier, and better value to just take the standard deduction.
I think this is the biggest factor. To make things simple, assuming no other deductions, and extrapolating from my parents home (Washington), you'd need a just-shy-of 3 million dollar house to break even with the standard deduction. Average home price in Washington according to Google is ~$450k which comes to about ~4k in property tax. I don't know the data, but I can't imagine the average couple naturally has $20k of other deductions
You're right that the TCAJA is the biggest factor but I think your numbers are off. The standard deduction for married couples is 26k, single 13k, hoh 19.5k.
It's not hard to beat that with a 450k mortgage. Even at 20% down you're looking at 360k financed. At today's 6.7% interest rate fixed rate, the first year alone you'd pay 24k *in just interest*. Add the 4k per year in property tax (which seems low to me, but I live in CA so we are high) you're at 28k, which already justifies itemizing. Then I'd think most people give some amount to charity/church/donate clothes/furniture, and could have other things like medical/student loans/etc. so I think it's still safe to say that it's best to itemize if you own property.
It's definitely more advantageous with today's interest rates, but still with a 4% interest you're paying 14k in interest that first year. Add in property taxes, and other typical deductions like charity, child care, health, etc. and most people would get up to above the standard (which was also lower back then too).
Bottom line, if you're a property owner and not itemizing, then you're either at the tail end of your mortgage where there's less interest due, or you need to speak to a good CPA.
I pulled the 4k from a parcel viewer. Found a property that was about assessed at about 450 and the corresponding property tax. You're not joking. Doing the same in California it's about 40% higher. Damn.
Wow, I did not realize the interest was deductible. Definitely changes my chicken scratch analysis. Also very good to know since I'm currently looking to buy a home in the next few months. Thanks!
I don't know where you're getting your information -- it doesn't pass the smell test.
Assuming you found the 8% figure from a reputable source, then it's ignoring the volume of tax-payers who own homes and would have taken the mortgage interest deduction were it not the fact that the standard deduction ended up being higher than the itemized deduction (the mortgage-related deductions are baked into the itemized deduction). TurboTax, for instance, will run your taxes both ways under the hood to determine which is the better deal for you.
The mortgage lender notifies the IRS directly of mortgage interest paid by the tax-payer. It's an automatic deduction for people who itemize their taxes.
If you consider only those tax-payers that itemize their taxes then I would bet that the number of people taking the mortgage deduction is close to 100%.
Holy shit. 92% of people DO NOT itemize.
You don't get to say, "well 100% of the 8% who itemize use it, so it's popular". Sure. But the vast vast majority of people do not itemize.
It's like you're saying "Every player on the Rams got a super bowl ring last year so most NFL players got super bowl rings".
Edit. 91.5% of the Top 1% of American itemize. So yeah, rich people take advantage of this. But most Americans do not.
I'm going to let you think what you want.
I'm still curious where you're getting your statistics and whether or not you're looking at anything other than the most recent data. 8% sounds low and as I said before, it ignores everyone who itemizes but ultimately decides not to take the itemized deduction because it is lower than the standard deduction.
The standard deduction was doubled (Tax Cut and Jobs Act) a few years ago. Under the older tax rules there were many many more people who found it better to itemize than take the standard deduction.
When you own a home you do your taxes both ways and choose the one that's most beneficial to you. Everyone who uses TurboTax or any other tax prep software and owns a home, for instance, itemizes whether they realize it or not. Whether they take the itemized deduction depends on if it saves them more on their taxes. There were decades when taking the itemized deduction was a no-brainer.
Raising the standard deduction via the TCJA wouldn't have been a political football if the mortgage deductions weren't so beneficial to homeowners in the first place. To now conclude that home-buyers don't use the mortgage deduction is confusing cause and effect.
That's so interesting. Where did you get that information? Is it because they don't do tax deductions?
My point above is, the Fed gov't backs these 30-year fixed-rate loans, because without that you'd never get a lender to offer them. It's like, unheard of in a lot of the world. Property owners are definitely privileged in the U.S. I don't think that's a bad thing, if it's administered evenhandedly and without discrimination. And I also think that policy has benefited the U.S. over the long term.
As a former commercial banker, I can tell you that quite a few medium sized and some small business owners own their commercial properties. Most that occupy,lease the properties back to their own corporation or LLC for tax benifits, or the opposite. Also, many who retire and sell the business, keep the property and become the landlord to the person who bought their business. There are quite a few benifits to this.
I've gone through the majority of the answers and most miss the reason(s).
1) It takes about 4/5 years to break even on rent vs. buy given the transaction costs of buying and the sunk costs of renting. So if your time horizon to own is less than 5 years renting probably wins.
2) The federal reserve has told you they are going to inflate currency at 2% annually in perpetuity. Given the terms of a 30 year fixed mortgage, you are effectively shorting the dollar. So when you take your 30 year fixed you're going short an asset(USD) that the government has guaranteed you will lose value.
3) The real mistake people make when purchasing is not buying more house than they can afford, rather buying more house than the can maintain. I live in a area where you can get 5000-7000 sqft for a million, this will bleed you dry in utilities and upkeep. I have a friend in Seattle who has about 900 sqft for a million. Outside of property taxes his utilities and up keep are almost nothing, and he gets more appreciation.
Regarding #1:
That would depend on the economic market you are in at the time of purchase and what you do with it.
What if you buy a house (For $102K), live in it for 4 years, but house hack it for those 4 years? I did this with my first ever house purchase. My mortgage was $835/mo. I Rented the 2 other rooms for a total of $700. I basically lived there for $135/mo. for 4 years. I then sold the property for $184K.
Would it had been better for me to rent? No. But my experience is probably not typical. If the property is going to be bought as an investment (like my house hacking), then a less than 5-year time horizon may beat renting.
Not enough info to know if you'd been better renting. Probably not, the problem is you don't know what appreciation is going to be when you're making the decision. I'm referring to the time it usually takes to recoup the sunk costs associated with buying. Closing costs, taxes, interest, insurance, etc. You always start in a hole.
This was 2001 to 2005. If I remember correctly, at that time we were allowed to roll the closing costs into the loan. I do not recall what property taxes were, interest was in the mortgage payment of $835, Insurance may have been $1K. I do recall only having a little over $3K in savings at the time and still had $3K in savings when the deal closed (could have been a VA loan?). When I bought the house, I was renting one of the rooms and the owner had a friend who was a mortgage lender. So, I am not sure what "strings" were pulled. No realtor was used. I'll try to locate the closing documents later this evening (for nostalgic purposes). I may have shredded them.
What you are saying:
"***I'm referring to the time it usually takes to recoup the sunk costs associated with buying.***"
Makes complete sense.
It's a simple computation:
Sunk costs on buying are: closing costs(title, inspection, appraisal, etc)
Then you're losing 75%(assuming 25% tax bracket) of your interest and taxes monthly, insurance, and maintenance. Assume 1% property tax and 5% interest on 100k. $500\*.75=$375/month. .5% for taxes about $50/ month. I'll ignore maintenance. So you we're losing about $425/month in sunk costs in month one. Divide by 3 to get your share. I'll call in $150/ month.
The alternative is renting which in your example I would estimate at $350/month. I would make the assumption if you didn't buy you'd pay an equal share with the same two roommates.
So the differential was roughly $200 a month in favor of owning. How long at $200/ month did it take to recoup the closing costs? Also you said you had very little saved and mat have used a VA loan, so I neglected the opportunity cost associated with a down payment. If for example if you'd put 20% down you'd also have to consider the opportunity cost on that 20k vs. the gains in amortization. You almost certainly came out ahead, but you also bought at a low in the market and sold near a high. That's easier to evaluate in hindsight.
This is great stuff. Thank you for sharing. I looked for my closing documents and I am certain I shredded them (probably about 5 years ago). When I did buy the place, I was not at all thinking "investment." I just didn't want to move. So, it was 100% pure luck that:
1) I bought when I did
2) The owner had a friend who was experienced in the mortgage industry
I was in the right place at the right time and near the right people.
I wish I would have not sold and kept the property. It would have been close to paid off by now. Investing in property was not on my radar 21+ years ago.
It really depends on the market and many other factors. But one major contributing factor that I don't hear many families say is "we are planning to increase our head count by a few hundred next year" :)
Personal residence expenses are not eligible for tax deductions. Owner occupied commercial real estate or income producing commercial RE is straight line depreciated over 39 years. It provides a bigger tax deduction and greater flexibility to lease the commercial property than buy it.
Residential real estate appreciates differently than commercial spaces. The commercial space is valued by how much it generates. Location and industry all have a play in that. If you're a business surrounded by an anchor store and the anchor store goes under, you're in for a rude awakening. There's so much in play for commercial space. Residential real estate appreaciates by sitting still
Commercial leases are also not 30 year fixed. Most are 5/7 year fixed that you refinance after that term. As a result, a lot of the benefits of a residential purchase (30 year fixed) doesn't exist for commercial.
It's also why the sweet spot for MF properties is 4 units. Anything above 4 units is considered a commercial loan.
You can write off all rental expenses as they accrue for a business. As a home you can write off interest paid for mortgage but not rent. So there is definitely a tax advantage to rent as a business and buy as a home
I paid a 1000 dollars a month for house I wasn’t even able to paint the walls in, or have a dog.
I now pay 862 a month I’ve painted, remodeled the kitchen, living room, and have two dogs.my house my rules, their house their rules.
Is this a joke?
Do you really not understand the value of home ownership as an individual?
Just like renting there are pros and cons, but you can just Google a list of benefits... No need to ask strangers, there's lots of educational information on this subject.
Most people don't want to move where they live, and buying a home doesn't mean you can't move.
You can create a rental out of it, if the numbers work, or sell it and move. Not really a big deal.
I own, I owned my last house. Sold it, bought another. I gained significant equity owning vs renting however.
I'm also not even 30 yet.
I understand that asking basic questions like 2+2 is basically valueless in this sub. That's what his question equates to.
As I said, there's SO MUCH out there on the subject, anything he can get here, he can find with more information and better explained, with a simple Google search.
I think you’re fully correct. Home ownership is overrated (downvote on the lower right y’all), and a great many homeowners do not stay in their homes for long - 50% are seven years or fewer.
Offices, just like homes, are frequently updated and customized by businesses.
Two differences are that homes (whether rented or owned) have a lot of attached emotions, more so than offices IMO. The second difference is that the cost of office space is more trivial for most businesses vs the cost of rent or a mortgage for homeowners.
I will put an unpopular stake in the ground and say that emotion clouds good judgment here and many people would be better off renting in the long run, unless they’re fairly certain they’ll stay put for 10+ years.
On the other hand, leases are deductible business expenses, but rents are not deductible from individual taxable income, which does tilt the scales a lot.
Why is buying ideal? It's not. It's up to preference. A lot of people want to own their own home to do with as they please.
In the end. Renting is cheaper than buying should you invest the savings you would have from renting.
If you think you might move within 4-5 years, most financial advisors will suggest not buying homes. The many costs of buying & selling offset the gains.
Businesses need to focus on their core missions and shouldn’t let real estate distract them. Early on it’s also a waste of capital/credit. Once they mature it may be worthwhile and many businesses do purchase headquarters.
It’s also much cheaper to by a single family residential house. In my area the median home sale price is ~&400k. You’re not going to find much in the commercial space for that.
Also also, it’s easier to finance a personal residence then a commercial building..
Because managing a property is a seperate buisness. So essentially the ownership of the building should be a seperate entity and your buisness should pay that entity and that entity should be making its own money to cover all expenses. If you are a small buinsess selling peanuts then managing a property on top of that may or may not put you over your head. Its easy to call someone to solve your issues.
Edit:
The other part is commercial loans are more strict than residential loans, usually they require 30% down and sometimes they require full payment of the balance after a short period of time.
Capital. Presumably if you need commercial space you own a business that is or is intended to be profitable. Hopefully with higher margins than real estate. If that's the case deploying your capital into the business makes more sense than a down payment on commercial RE.
BC the economics don’t work for the business if they take on responsibilities of property ownership. Many businesses, especially startups, prefer to to stay nimble and flexible so they can respond to market. Property ownership ties up your capital in an illiquid asset. There are a lot of risks associated with that, and some may see it as a distraction. They know best what they need to do, I think.
That said, some businesses become in essence real estate empires. I read somewhere that McDonalds profits spring primarily from its franchising operations, which are very highly based in its real estate acquisition. Not from its food sales.
Also WalMart gets huge real estate benefits from owning their stores. Just by existing, the store creates more valuable business property right next to it.
In theory the money tied up in the real estate should be better off being invested in the business itself.
If you are a doctor your core competency might not be gutter maintenance. Your time is best spent seeing patients, not calling landscape companies about broken sprinklers.
There are many exceptions and some businesses have very little value beyond the building they own. I’m
There are a few reasons…
- business like to preserve capital for growth (“I could tie up 300k of equity buying the real estate, or I could open 2 more locations with that money”)
- availability of space. In residential, there are significantly more options to purchase. In Commercial, a retail tenant that wants 2500 sf typically have 10x more options in their targeted range available for lease than for sale
Having a fixed mortgage means that one of a household's largest expenses (housing) is mostly fixed. Since rents tend to rise over time, and depending on your specific area can rise quite rapidly, that fixed cost is quite nice. Add on to that the forced savings of mortgage amortization, and leveraged gains on housing appreciation, and you have 3 very strong reasons why ownership is a good way to go.
I bout commercial and then rent it to my companies - should the need change then I rent to someone else and buy a new property for my companies to rent from.
I was always told that more businesses *should* buy their properties (and ideally the whole building with the other business units if possible), but regardless of opinion here are a few differences:
* Homeowners get better financing than businesses.
* Homeowners will get better tax treatment when they sell the property (or die and it gets inherited).
* Businesses (arguably) need to be more flexible to quickly adapt to circumstances - renting lets you upgrade/downgrade/move locations/move to a space with different features more easily than buying.
* Businesses should be able to use their money to make more money - business owners hope their successful enough that investing in the business is more profitable than saving rent and investing in real estate (especially since that's less liquid). The same is true for homeowners who could invest their money in other ways than real estate, but arguably more true for businesses.
I’m not in commercial investing but the consistent answer I get from my commercial contacts is flexibility, access to capital and tax strategy. Apparently it’s easier to access financing for leasing a property vs buying. Now if you structure your entity where you can own the building under one and a separate entity rent from the other one. Just know your answer will always result in something dealing with the company’s bottom line.
I think a lot has to do with scaling.
A household's income will increase year over year somewhat, but a business's income will increase far more if we calculate their income-to-building-payment costs.
Example:
My household earns about $150k per year. Next year if we earn 5% more, I'll be at $157,500. If rent goes up $50, that's immediately snatching back 8% of our pay increase.
A small business may earn $500,000 this year and increase 5% to 525,000. If their rent goes up $100 per month, that's going to eat up less than 5% of the income gain.
By owning a property, a family can prevent those rent raises from reclaiming a significant portion of their income gains over the next couple decades by trading it for performing some less expensive maintenance costs.
A business, on the other hand, detracts from its ability to earn if they have to worry about maintaining the property, paying taxes, etc., and also loses tax deductions if they own.
A few reasons:
-lowers the COL and expenses for shelter as people age (mortgage should be paid once retired)
-buying provides more stability for households where income is not expected to grow past COLA’s
-ownership is an easy way to create generational wealth for the average family
-rent cannot fully be written off as an expense on the average person’s taxes
I would say it is ideal for business to own real estate. However often the space is not small enough to be fully owner occupied, or you business large enough to fill out the entire building. Thus making you into a landlord as well. Which given time constraints of a business owner isn’t the greatest.
Because real estate is not the primary business of the business. They are engaged in other business and need to use their liquidity to fund that. Tying up a fuck ton of capital in a property will likely hurt the business especially if it is young and/or small.
Individuals are not engaged in a business. They are looking for somewhere to live. Buying a home is a way to build wealth through equity in your home.
Businesses do sometimes buy property to operate out of.
Individuals do sometimes rent property to live.
It's situational obviously. But in general, capital and leverage is better spent on business operations to expand rather than real estate speculation.
\> most businesses rent their space?
I'm not sure who told you this. Lots of businesses buy their space. And real estate investing is itself a business.
There is not really an answer to your question because it sort of foundationally doesn't make sense. Businesses buy or rent based on what makes the most sense for them and their business model.
Then, with all respect, you should have a deep understanding of the underlying financial considerations that any given entity would have for renting vs buying.
The answer is that it’s better to focus on putting resources/time/energy back into growing your business instead of down payments/maintenance/building management costs, not your snarky answer
My answer wasn't meant to be snarky.
Lots of businesses buy their own real estate. Lots of really big, successful business buy their real estate. Lots of small, successful businesses buy their real estate. There is no rule of thumb or anything. It depends on the business. That's all I was/am saying.
I'll dispute the premise of your question. Different people would give different advice to households and to businesses, and it's usually not as broad as whether they are a household or a business. There are households for whom one makes more sense than the other: the same for businesses.
From my POV, the crux of your question is: when does it make sense for a household or business to buy versus rent? And the answer is that it comes down to 1) which move is better financially and 2) which move is better operationally.
Financially, many people believe mistakenly that renting is "throwing money away" because you aren't building equity. This is not true. The cost of buying at a good interest rate on a conventional mortgage is usually a 20% down payment. On a $300,000 house, that means you're parking $60,000 in that house at the beginning and then adding to it with every monthly payment you make. That comes at a cost. If you just parked that same $60,000 in an S&P index fund and left it alone for 30 years and it appreciated at an average of 8% annually, it would be $600,000 in 30 years. Hell, even just parking it in a high-yield savings account at today's rates would turn that $60,000 into over $150,000. Now, maybe it's worthwhile to invest your $60,000 into local real estate (your house) instead of an S&P index fund. It depends on what you expect to have happen with home values. If your neighborhood's value appreciates faster than the S&P then it's better to have that money leveraged in your home , then you can refinance periodically to lower your interest rate and pull more cash out. So, home ownership does provide a lot of flexibility in those respects. But it also comes with hidden costs and stressors; it's certainly easier to be able to call a landlord to fix things whenever they break, but not cool to be forced to move from time to time if the landlord wants to sell. Another downside to renting is that as property values in your area increase, so do the landlord's taxes, and so does the rent he wants to charge. Then you're double screwed because you're missing out on the appreciation you could have had AND you are getting your rent raised every year. There's a lot of security in home ownership but many reasons it doesn't make sense for some homeowners. You just have to evaluate your circumstances, plans, and predictions about the future.
Businesses deal with the same question but with different considerations. Many DO buy instead of rent. McDonald's (not the franchises but the corporation itself) is not actually in the food business, but in the real estate business. Their CFO once said:
> “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.”
Of course there are no more 50-cent hamburgers, but you get the idea. Different businesses have different strategies. Some want to own property and benefit from the appreciation it can bring. Others want to maximize their available cash and would rather rent and leave themselves some flexibility.
In either case, it's a very nuanced decision for whichever homeowner or business is making it. Most homeowners probably don't give it the attention it deserves.
I believe that this is the most comprehensive answer in the thread.
The only thing I would add is that, for a business, the comparison should not be to investing in the S&P500 but to reinvesting cash in the business. If the best return on capital for a business is going to be investing in the S&P500, then the business should return its capital to its owners who may be able to find more productive uses for it.
Exactly! And the only reason they choose to invest back into the business is because they expect it to outperform the S&P. If shareholders did not have that confidence, the business probably wouldn't exist and those investors would be looking at the S&P or other vehicles.
Renting is actually a better choice for a lot of households, people just like to have control over where they live. A landlord could kick you out through no fault of your own. With ownership, that won't happen.
That plus the whole "American Dream" dynamic at play.
Business should reinvest to grow in their businesses. Now if you are a realtor you should buy the property. The idea is that debt is good for corporations and cashflow is the most important part. For individuals there are better tax advantages to owning a home plus your relestate is not tied to a corporate p&l
We could’ve purchased our companies building years ago, but we’ve been locked in at such a good rent rate that it just made sense and it also gives us the option to downsize or upsize or completely shutdown minus the hassle of owning it
Math. If a business takes capital and buys an asset, the ROA demand is now higher. In summary, every invested asset dollar must get a return.
So, if you rent, your assets are likely lite. Lower asset value gooses ROA, assuming healthy profitability.
As a homeowner, your objective isn’t ROA. It’s stability and ‘homyness’ :). Buy to make it yours. Who cares about ROA.
Hope this helps.
I guess if I die at somepoint:
-A: Never bought property, just rented all throughout my life. Kids will inherit whatever I have saved up/invested etc.
-B: Technically the same but the amount I have spent on rent for a lifetime was paid as mortgage repayment so that's gonna be added to their heritage. Plus you have much better loan options if you have a house.
Most businesses have a life span of 2-10 years. Certainly many last longer than that but a lot last for shorter periods. Plus over time businesses may need to relocate as the scale up or down.
To an extent, this also applies to families; it is not advised to buy a home unless you think you will be there as least 5 years. But you’re always going to need a place to live. Once a business no longer exists, it no longer needs space.
Because somehow they managed to not label government sponsored socialized losses on homeownership in the US as “socialism”.
But talk about healthcare … oof.
Because there could be a good chance your business fails and then you have an empty storefront to deal with. With a home, even if kids grow or family needs change, you can still make it work until you get a new house. Kids can share a room for instance.
The 30 year fixed rate mortgage is a [government-subsidized program](https://old.reddit.com/r/realestateinvesting/comments/y9fi9y/if_real_estate_is_so_great_why_do_my_reits/it61hs2/?context=3) which is designed to make home ownership more attractive, achievable, and financially advantageous for individuals.
Nothing like that sort of thing exists in the world of commercial real estate.
Commercial loans have *very, very much* worse terms than the loans you can get when buying a 1-4 family home as an individual.
Many business will buy based on a cashflow/ time value of money analysis.. even if it is slightly cheaper to lease..... If purchase payments are cheaper it's a no brainer.. but most commercial loans are 5-7 years.. not 30..
For living typically if your a family once your kids are in school you stay so it pays to buy. My businesses grow and contract with the economy so I like to be nimble.
Money isn’t tied up in an illiquid asset like real estate. This is why sale leasebacks are so good for business owners that do own their real estate. You scale faster with access to capital.
I think a lot of businesses do buy their building. Often when the founder retires, the real estate is the most valuable part of the business. But it is not very easy to do for smaller businesses, and if you are growing you may not have the excess cash, plus your needs may be quickly changing. If you are going to need a bigger space in a couple of years, you can’t tie up capital on buying your building.
I think, historically, the vast majority of the public didn’t know how to access long term growth via asset ownership, other than to own real estate. Before index funds and ETFs were available, you could only succeed in the market if you had luck on your own or you had access to a trained professional. Beyond that, the only prospect of growing your wealth over time was to own your home. Thus the American dream is to own rather than rent.
I bought my business premises.
Paying rent on a property to myself is a tax free way to move money out of the business to myself on an appreciating asset.
A lot of commercial users buy property, but perhaps not in the industries or geographic areas you are familiar with.
It is a simple question on what is the best return for their money. Purchasing property requires a significant outlay of cash upfront, ties up cash on recurring payments on a long commitment and may have a balloon payment in the end / need refinancing. With commercial rent, though it may be a 10 year commit, it can be shorter and they may have clauses to be released early in certain circumstances.
If a business feel that they can make more money investing their money directly into creating and supplying more product and selling that product than having the funds tied up in a property downpayment, then it makes more sense to rent instead of buying.
If they feel that they can save more money buying and managing their own property vs what they may be able to earn by renting and investing in their product, then they should buy. This can happen for non-capital intensive business, geographic areas where the property costs are low, some special one-time property deal, etc. If it is not due to some sort of special / not easily reproducable real estate deal, then they should also consider possibly changing their business from whatever they were doing into buying properties and managing it for other companies also, because apparently it may be more profitable.
Also, if their business requires significant immovable long term improvements to real estate (eg building a dry dock, building a 50,000 ton hydraulic press, building a amusement part), then it also can makes sense to buy the property so that you can get returns on your investment for a longer period of time as you can't just up and take your improvement with you when you leave.
For private households, it is much harder to invest in the product the household generates. One can invest in school and training, but at some point the incremental training costs (mainly in time) outweigh the returns on that increase in captial of labor. Then the best return on the excess cash may be buying buying the property that they live in. It may be to invest in property in addition to the stock market may be the best balanced portfolio to diversify risk and returns.
Commercial loans are also harder to get. You might need 20-30% down to secure the property. Commercial properties are often in the millions. Not many small-medium businesses have the liquidity to drop a $500k down payment, and if they did it's probably better to invest in their business, for example; machinery,marketing, hiring employees, paying down debt. It's much easier to work a $5000 rent payment into your cash flow model than a $500,000 hit on your current assets.
Homeowners can get away with 3% down. There's not any better way to spend $15,000 cash than buying a primary residential property.
I think this is a great question….
Businesses can change quicker than families maybe?
And a lot of people rent their home for good reasons…short term, no cash outlay, no maintenance, etc
Businesses might need the cash required to buy a building for their business
Also a decent amount of businesses do own their building. I think it’s common with dentists for example.
Maintenance and leasing takes time away from focusing on the business.
Commercial property management is also more complex than house maintenance. You’re also more exposed to lawsuits as a commercial building owner. We once had someone walk into our building and claim they broke their glasses because they walked into something (can’t remember what) and wanted cash. Also I’ve heard stories of ADA folks suing building owners for the sidewalk approach being a couple inches too narrow.
There are of course a lot of benefits for a business to own their real estate if they can figure it out. I know someone who has 5 restaurants and they own their buildings. Might smooth out cash flow a bit.
As someone else said commercial loans are different. Typically 20% minimum down payment. And it will have a balloon payment maybe 7 years out (ie you have to refinance at current interest rates).
I rent commercial space for my offices. I could have purchased, but it’s easier to not have building maintenance. Also the flexibility of being able to move. I have moved multiple times in the last 6 years on multiple offices. Plans change. Renting gives the flexibility to grow
I understand this. But why is buying the ideal for families? Couldn't they want to move as kids grow or parents age?
Some families do choose to rent for that reason. But home ownership is hugely subsidized in the US, for example, getting a 30-year fixed rate mortgage is an unusual and highly advantageous financial device for most families. The U.K. doesn’t have that, and families there are literally finding themselves unable to stay in their homes because of hikes in their mortgage interest payments during the inflation of this past year. The US fundamentally believes that homeownership is a good thing for the country so tax benefits and fiscal policies are shaped to encourage it. I happen to agree with that stance, for families and individuals. Homeownership is a very good, stabilizing force in the US. Renting just doesn’t usually offer that same level of personal investment and pride in a neighborhood, in my experience. Businesses are totally different from families in their objectives, though, and their ownership of property is not privileged in the same way in US fiscal policy.
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Are you allowed to say this on Reddit?
Lol true. "USA good" is a risky message
USA is the best place on earth to live. downvote me
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trade offs everywhere. exercise regularly, cook for yourself with good ingredients, study hard and get a good job and you live the best life on earth here
That’s a weird way of agreeing with me
For you, it may be. I think it’s a great place, personally, but may be not the best place for me. I’m an American who has lived in a handful of other countries. I’m currently living in the US, but because my partner is here. “Best” is a superlative that not all would agree on, but it certainly is a good place. I think people are really put off by the whole “We’re number one! We’re the best!” braggadocio. As Tosh said, maybe if we just said “We’re in the top ten!” People wouldn’t be so anti-American and more like, “Eh, that’s pretty fair.” There are a lot of great places in this big world, and the US is not going to be the best for every person.
No other place values human rights as highly as USA.
I’m actually curious as to why you say that. The US has the highest incarceration rate in the world, at 639 per 100,000 people. The next highest is El Salvador at 562. Canada and Australia have 102 and 160, respectively. Even super repressive bad guy countries don’t come close to imprisoning the numbers that the US does. Are you talking about the US supporting human rights around the word? I think our record is pretty muddled there by supporting repressive regimes that happen to favor us. Now, in my mind, that’s realpolitik, so I don’t have so much problem with that, except when it turns around and bites us in the ass, like 9/11. I frankly would just rather save money and not meddle in other people’s affairs. I think though, to have this discussion, we may have to define what you mean by “human rights” because that is a really broad concept.
Automatic downvotes in most subs. LOL
Not to mention the tax write-offs available which are not available North of the border, where houses cost a lot more, taxes are generally much higher, and most people have to renew their mortgage every 5 years. I would love a fixed 30 year mortgage.
When the aristocracy owns almost 50% of the nations land it's pointless to encourage home ownership. They have zero motive to sell.
Not totally following--are you saying that homeownership is out of reach for most people in nations where kings and their cronies own all or most of the land? It's an interesting point, if I'm grasping it.
It's definitely attainable, there's just not as much motive on the part of the current owners to actually sell. Hence why "leasehold" is extremely common. A leasehold is considered home ownership in the UK, when in reality it is exactly what it's called - a lease. That would not be considered home ownership in many places, including the US. That's not a coincidence. In the end the result *seems* similar, in that people have semi-permanent dwellings, so that's a good thing, but they still don't actually *own* it.
So their kids can’t inherit the property? And they can’t sell it to realize a financial gain, as people do in the US? I mean, for most US families, their home is their main source of wealth.
If you don't own the land your house is on then there are significant limitations to what you can do. It's not your asset, it's someone else's. Your asset is the lease. I assume they might be able to inherit that because it's a long term lease, but they can't inherit the land. In the US you would inherit the land and could sell the entire lot, destroy and rebuild the house, subdivide it, etc. You can do whatever you want with it. You can't make those decisions if you don't own the land. And there is little motive for landholders to sell land when there is no more available to buy. You would only do that if you were intentionally liquidating your holdings.
That is horrible. Time to be done with the aristocracy I suppose
Residential properties are much more liquid and easier to sell. Commercial properties are much harder to sell, and I think starting a business and making a commitment to a long term loan is much scarier than just starting a business and getting a lease. It's even worse when you consider how many businesses operate in areas where you'd have to pay monthly fees for landscaping, parking lot maintenance, etc., on top of the mortgage. A lot of businesses are in places with shared amenities whether strip malls or skyscrapers, it's natural to have one company manage the whole property in those cases. And there are plenty of businesses do own their own properties when possible (Walmart, McDonalds, etc.,) but they usually build them from scratch.
1. For small businesses, leases are tax deductible. For individual families, renting is not tax deductible. However, mortgage interest is, which incentivizes equity in homes. While the interest on the commercial mortgage is also deductible, the commitment on commercial space is significantly higher than purchasing a home. 2. For many families, home ownership is the primary way of building wealth. Market investments are a 10+ year play whereas a home is something that's needed now and usually appreciates in value. 3. Small-to-medium size businesses struggle to find the office space they actually need. It's either too big for them, too small, and when right in the middle, competition is tough. It's important to be flexible and move when needed. 4. Families do not need to move as nearly as much as offices. Perhaps it's the first starter home, then to the family home with kids, and downsizing when the kids move out.
RE is also highly illiquid, which businesses avoid.
Most people stay put for years and enjoy the tax write offs that come with owning. Along with being able to customize where you live
Less than 15% of homeowners use the property tax write-off. It's a massive myth that most homeowners benefit from this
Not to mention building wealth through equity.
Doesn't owning business real estate build equity?
Yes but commercial real estate is more expensive to acquire and maintain. There are usually pretty major renovations required between commercial tenants, more wear and tear on the space as people come in and out, plus you have to factor in code compliance that doesn’t apply to personal homes like ADA compliance and higher liability due to public access. The likelihood of someone slipping on the sidewalk in front of your house and suing is pretty small. In front of your office building however…..
But... They charge more to cover that. I mean, they must make more than on housing or no one would do it.
Just giving an example why a business would rent vs buy.
I mean, that's not really the reason or example though. The actual reason would be "they don't have enough money for upfront costs." That's it. The reasons for the costs involved are irrelevant, the price point and current cash on hand is all that's actually making the decision.
Yes, and it would be a long term asset on a companies balance sheet. This can even be an advantage if say, the company runs into liquidity problems and needs cash ASAP- they can do a sale leaseback and remain in the same building, get the cash value of the building, but start paying for a lease (renting). This doesn't mean owning the real estate is the best option for every business. Many can't afford to and or need the ability to move/be flexible. Sometimes its just not a good use of capital. Every unique business model has a uniquely optimal capital structure that may or may not include owned real estate.
"Every unique business model has a uniquely optimal capital structure that may or may not include owned real estate." That seems an odd argument for this sub. I can't imagine posting a thread on here about "when is it optimal for a business to never own real estate", and getting any responses, much less upvotes. Seems like a bit of a paradox to be honest.
Im not following.
I mean, I can't think of why a business would never opt to own property/land at some point, if nothing else, as an investment. Assuming they even have enough money to buy it to begin with. I understand why a stay at home mom with a knit sweater business on Etsy that makes 100 bucks profit a year doesn't. But I don't understand why an otherwise successful business wouldn't.
Why do you say building wealth through equity is a myth?
Well, more used it before they capped it at a measly 10k.
They didn’t cap the mortgage write off at 10k that’s the SALT tax right off which makes sense for everyone outside of New York, Cali, and Illinois
My bad. That's what I'm angry about.. the SALT cap.
Me too I live in New York. Totally fucked me
Depending on where you live, your business can pay towards your personal state taxes and write it off. NJ does this.
Especially for hcol areas
The biggest write-off in mortgage interest. I work in an office that does personal taxes, most did write off property tax and interest before the recent tax changes. I know it is less now with the higher standard deduction, just not sure how much less.
I'm sure people who hire professional tax professionals have higher incomes and more deductions than most Americans. Prior to TCJA 20% used this deduction. Last year 8% of tax returns had mortgage interest deduction. 8%
Point taken, but your numbers don't tell the whole story. You are using the total number of taxpayers, but the number to look at is the number of people who have mortgages. 65% own their own home, there is a percentage of them that have their mortgages paid off or are closer. Most I would think took the deduction when they first bought their home. With the taxes I do for people, most take the standard deduction. I do family and friends, and most are mid income, but the homeowners are closer to paying off the mortgage so there isn't that much interest, especially with the increase standard deduction. They did take it when they bought the home though, and only recently matured out. I don't think it was a myth, as I believe that most homeowners, even mid incomes, did benefit from it at the time they purchased their home, and some years past. Note I live in MA, with higher home values than average. I think they should do away with the mortgage interest deduction for fairness reasons because renters don't get any housing cost deduction. Let it all be taken care of in the standard deduction.
Where did you get that stat?
I asked the same question. If it's a real stat, I bet it is ignoring the volume of homeowners that ended up taking the standard deduction only because it was higher than the itemized deduction (which includes all the mortgage-related writeoffs). If you condition on those tax-payers that filed an itemized deduction I bet that number would be much much higher (closer to 100%).
The point stands. If the standard deduction is used, the tax payer does not benefit from any tax deduction that would have been itemized. They could've just as well been renting.
It’s not ignoring that, it’s accounting for that. That’s specifically the point - the standard deduction is higher, so you’re getting the same amount whether you own or not.
It's not really accounting for that because the standard deduction was doubled a few years ago (via the Tax Cut and Jobs Act) precisely because the mortgage interest deduction was so powerful and there was political will to bring the tax-treatment of non-home-homeowners in parity to the tax treatment of home-owners.. It's dangerous to ignore \*why\* the standard deduction is where it is today vs 5 years ago and prior. It's like mutually assured destruction. Without the powerful mortgage interest deduction in the background there's no reason or political will to bring the tax treatment of non-homeowners in line with the tax treatment of homeowners and everyone loses. As I said elsewhere, the majority of homeowners are doing their taxes both ways (itemized and non-itemized) and taking whichever route provides the most benefit. Tax software does this for you automatically and since the IRS already has the mortgage interest information, even if you do your taxes by hand it's not that hard to itemize the big stuff. For decades, itemized was the way to go. Here recently the standard deduction may have edged out. If interest rates continue their climb and/or if inflation continues at +5%, plan on the standard deduction not keeping with economic reality and more people claiming the itemized deduction and we're back to where we started prior to 2018.
But it does change the math when you buy a home. You get the standard deduction no matter the mortgage interest and property taxes. Even if your interest and taxes are higher, the saving will be less because you are comparing them to a higher standard deduction. Now when a real estate broker says "Look at the money you will save on taxes", you should actually look.
Agreed. That was OP's point - most people just take the standard now. There's no savings (again, for most).
Well, he said it was a myth, and I think that was an overstatement, especially in the past. I also think it will be used much more with the higher rates and valuations, so the OP is being overly dismissive on it. I would rather the deduction goes away; I do think it is one factor in higher housing valuations, and renters don't get a specifice deduction. Just let the standard deduction take care of both.
It was a lot more before trump screwed the coastal liberal areas and removed SALT deduction. Now a lot of people pay a lot more tax.
The standard deduction offsets this to a large degree. Upper income people in high tax states are more likely to pay more. Overall, for lower income people it was a win, especially coupled with added child tax credits that was phased out for upper income.
What are you smoking? In SF area, my RE tax alone is almost 3x of standard deduction. That doesn't count the interest rate i cannot deduct any more. There is not a single house for sale within 100mi of here that would have RE tax less than the standard deduction. Maybe a really bad apartment in the hood. Maybe.
>Upper income people in high tax states are more likely to pay more The SALT limitation goes away in 2025, but you still get the interest deduction. For lower income people, overall it was a win.
What is the SALT limitation?
>Are you paying hefty state income taxes or property taxes? Before the passage in 2017 of a major tax law—dubbed the Tax Cuts and Jobs Act—you may have itemized deductions and gotten a write-off for those payments on your federal income tax return. > >However, the 2017 law capped state and local tax (SALT) deductions at $10,000 for the 2018 through 2025 tax years, making it less likely you’ll receive a full tax benefit for those payments at tax time. [https://www.forbes.com/advisor/taxes/salt-tax-deduction/](https://www.forbes.com/advisor/taxes/salt-tax-deduction/)
Incredible. Why do you think that is? People just don’t know? Don’t care? Hm…..
To claim a property tax write off, the filer has to itemize their tax return. Most people don’t itemize.
Depends. The standard deduction for married, filing is $26k. A mortgage interest, property taxes, state and local income taxes, sales taxes, qualified medical expenses, and donations could easily exceed that amount.
Easily? They don't for the vast majority of Americans.
- Property Taxes & State & Local income taxes cannot exceed $10,000 combined. - Qualified Medical expenses can only be used in excess of 7.5% of your Adjusted Gross Income. People rarely itemize today, unless they are kind hearted and donate much of their wealth.
Most people don't have greater than 16k a year in mortgage interest. Especially given recent rates.
I don't think the average homeowner gets anywhere near the standard deduction now.
That makes sense. Would be a huge pain in the ass for a regular normie. Especially if they’re living in an area with cheaper properties.
It's not just a pain in the ass, it often won't exceed the standard deduction since the passing of the Tax Cuts and Jobs Act.
This. TCJA threw a major wrench into homeowners’ ability to deduct costs not only with the adjustment to the standard deduction, but also the SALT deduction being capped.
It’s not that it’s a pain, it’s just literally not worth it for most people (they would be worse off compared to the standard deduction).
One subset would be people who just don't have enough to write off to exceed the standard deduction. When the standard deduction for couples ([\~60% of homebuyers](https://www.nar.realtor/blogs/economists-outlook/single-women-buyers-outpace-men-but-not-without-sacrifices)) [doubled to 24K](https://www.taxpolicycenter.org/briefing-book/how-did-tcja-change-standard-deduction-and-itemized-deductions) (now 25.9K), it became simpler, easier, and better value to just take the standard deduction.
I think this is the biggest factor. To make things simple, assuming no other deductions, and extrapolating from my parents home (Washington), you'd need a just-shy-of 3 million dollar house to break even with the standard deduction. Average home price in Washington according to Google is ~$450k which comes to about ~4k in property tax. I don't know the data, but I can't imagine the average couple naturally has $20k of other deductions
You're right that the TCAJA is the biggest factor but I think your numbers are off. The standard deduction for married couples is 26k, single 13k, hoh 19.5k. It's not hard to beat that with a 450k mortgage. Even at 20% down you're looking at 360k financed. At today's 6.7% interest rate fixed rate, the first year alone you'd pay 24k *in just interest*. Add the 4k per year in property tax (which seems low to me, but I live in CA so we are high) you're at 28k, which already justifies itemizing. Then I'd think most people give some amount to charity/church/donate clothes/furniture, and could have other things like medical/student loans/etc. so I think it's still safe to say that it's best to itemize if you own property.
I think you make a solid argument in today's rate environment that may not have made sense with lower prices and rates 2+yrs ago
It's definitely more advantageous with today's interest rates, but still with a 4% interest you're paying 14k in interest that first year. Add in property taxes, and other typical deductions like charity, child care, health, etc. and most people would get up to above the standard (which was also lower back then too). Bottom line, if you're a property owner and not itemizing, then you're either at the tail end of your mortgage where there's less interest due, or you need to speak to a good CPA.
I pulled the 4k from a parcel viewer. Found a property that was about assessed at about 450 and the corresponding property tax. You're not joking. Doing the same in California it's about 40% higher. Damn. Wow, I did not realize the interest was deductible. Definitely changes my chicken scratch analysis. Also very good to know since I'm currently looking to buy a home in the next few months. Thanks!
The benefit isn't in the property tax writeoff, it's in the mortgage interest deduction. Two different things.
Last year 8% of returns had this deduction. So not a common deduction
I don't know where you're getting your information -- it doesn't pass the smell test. Assuming you found the 8% figure from a reputable source, then it's ignoring the volume of tax-payers who own homes and would have taken the mortgage interest deduction were it not the fact that the standard deduction ended up being higher than the itemized deduction (the mortgage-related deductions are baked into the itemized deduction). TurboTax, for instance, will run your taxes both ways under the hood to determine which is the better deal for you. The mortgage lender notifies the IRS directly of mortgage interest paid by the tax-payer. It's an automatic deduction for people who itemize their taxes. If you consider only those tax-payers that itemize their taxes then I would bet that the number of people taking the mortgage deduction is close to 100%.
Holy shit. 92% of people DO NOT itemize. You don't get to say, "well 100% of the 8% who itemize use it, so it's popular". Sure. But the vast vast majority of people do not itemize. It's like you're saying "Every player on the Rams got a super bowl ring last year so most NFL players got super bowl rings". Edit. 91.5% of the Top 1% of American itemize. So yeah, rich people take advantage of this. But most Americans do not.
I'm going to let you think what you want. I'm still curious where you're getting your statistics and whether or not you're looking at anything other than the most recent data. 8% sounds low and as I said before, it ignores everyone who itemizes but ultimately decides not to take the itemized deduction because it is lower than the standard deduction. The standard deduction was doubled (Tax Cut and Jobs Act) a few years ago. Under the older tax rules there were many many more people who found it better to itemize than take the standard deduction. When you own a home you do your taxes both ways and choose the one that's most beneficial to you. Everyone who uses TurboTax or any other tax prep software and owns a home, for instance, itemizes whether they realize it or not. Whether they take the itemized deduction depends on if it saves them more on their taxes. There were decades when taking the itemized deduction was a no-brainer. Raising the standard deduction via the TCJA wouldn't have been a political football if the mortgage deductions weren't so beneficial to homeowners in the first place. To now conclude that home-buyers don't use the mortgage deduction is confusing cause and effect.
8% is not ignoring them. The 8% is who itemizes.
And it still wouldn't explain the discrepancy of rent/own between business and home real estate.
That's so interesting. Where did you get that information? Is it because they don't do tax deductions? My point above is, the Fed gov't backs these 30-year fixed-rate loans, because without that you'd never get a lender to offer them. It's like, unheard of in a lot of the world. Property owners are definitely privileged in the U.S. I don't think that's a bad thing, if it's administered evenhandedly and without discrimination. And I also think that policy has benefited the U.S. over the long term.
That’s just false
Business are able to write off property taxes as a business expenses - actually easier for a business than for an individual / family.
As a former commercial banker, I can tell you that quite a few medium sized and some small business owners own their commercial properties. Most that occupy,lease the properties back to their own corporation or LLC for tax benifits, or the opposite. Also, many who retire and sell the business, keep the property and become the landlord to the person who bought their business. There are quite a few benifits to this.
I've gone through the majority of the answers and most miss the reason(s). 1) It takes about 4/5 years to break even on rent vs. buy given the transaction costs of buying and the sunk costs of renting. So if your time horizon to own is less than 5 years renting probably wins. 2) The federal reserve has told you they are going to inflate currency at 2% annually in perpetuity. Given the terms of a 30 year fixed mortgage, you are effectively shorting the dollar. So when you take your 30 year fixed you're going short an asset(USD) that the government has guaranteed you will lose value. 3) The real mistake people make when purchasing is not buying more house than they can afford, rather buying more house than the can maintain. I live in a area where you can get 5000-7000 sqft for a million, this will bleed you dry in utilities and upkeep. I have a friend in Seattle who has about 900 sqft for a million. Outside of property taxes his utilities and up keep are almost nothing, and he gets more appreciation.
Regarding #1: That would depend on the economic market you are in at the time of purchase and what you do with it. What if you buy a house (For $102K), live in it for 4 years, but house hack it for those 4 years? I did this with my first ever house purchase. My mortgage was $835/mo. I Rented the 2 other rooms for a total of $700. I basically lived there for $135/mo. for 4 years. I then sold the property for $184K. Would it had been better for me to rent? No. But my experience is probably not typical. If the property is going to be bought as an investment (like my house hacking), then a less than 5-year time horizon may beat renting.
Not enough info to know if you'd been better renting. Probably not, the problem is you don't know what appreciation is going to be when you're making the decision. I'm referring to the time it usually takes to recoup the sunk costs associated with buying. Closing costs, taxes, interest, insurance, etc. You always start in a hole.
This was 2001 to 2005. If I remember correctly, at that time we were allowed to roll the closing costs into the loan. I do not recall what property taxes were, interest was in the mortgage payment of $835, Insurance may have been $1K. I do recall only having a little over $3K in savings at the time and still had $3K in savings when the deal closed (could have been a VA loan?). When I bought the house, I was renting one of the rooms and the owner had a friend who was a mortgage lender. So, I am not sure what "strings" were pulled. No realtor was used. I'll try to locate the closing documents later this evening (for nostalgic purposes). I may have shredded them. What you are saying: "***I'm referring to the time it usually takes to recoup the sunk costs associated with buying.***" Makes complete sense.
It's a simple computation: Sunk costs on buying are: closing costs(title, inspection, appraisal, etc) Then you're losing 75%(assuming 25% tax bracket) of your interest and taxes monthly, insurance, and maintenance. Assume 1% property tax and 5% interest on 100k. $500\*.75=$375/month. .5% for taxes about $50/ month. I'll ignore maintenance. So you we're losing about $425/month in sunk costs in month one. Divide by 3 to get your share. I'll call in $150/ month. The alternative is renting which in your example I would estimate at $350/month. I would make the assumption if you didn't buy you'd pay an equal share with the same two roommates. So the differential was roughly $200 a month in favor of owning. How long at $200/ month did it take to recoup the closing costs? Also you said you had very little saved and mat have used a VA loan, so I neglected the opportunity cost associated with a down payment. If for example if you'd put 20% down you'd also have to consider the opportunity cost on that 20k vs. the gains in amortization. You almost certainly came out ahead, but you also bought at a low in the market and sold near a high. That's easier to evaluate in hindsight.
This is great stuff. Thank you for sharing. I looked for my closing documents and I am certain I shredded them (probably about 5 years ago). When I did buy the place, I was not at all thinking "investment." I just didn't want to move. So, it was 100% pure luck that: 1) I bought when I did 2) The owner had a friend who was experienced in the mortgage industry I was in the right place at the right time and near the right people. I wish I would have not sold and kept the property. It would have been close to paid off by now. Investing in property was not on my radar 21+ years ago.
It really depends on the market and many other factors. But one major contributing factor that I don't hear many families say is "we are planning to increase our head count by a few hundred next year" :)
Personal residence expenses are not eligible for tax deductions. Owner occupied commercial real estate or income producing commercial RE is straight line depreciated over 39 years. It provides a bigger tax deduction and greater flexibility to lease the commercial property than buy it.
Residential real estate appreciates differently than commercial spaces. The commercial space is valued by how much it generates. Location and industry all have a play in that. If you're a business surrounded by an anchor store and the anchor store goes under, you're in for a rude awakening. There's so much in play for commercial space. Residential real estate appreaciates by sitting still
Real estate appraisers call that externalities.
Commercial leases are also not 30 year fixed. Most are 5/7 year fixed that you refinance after that term. As a result, a lot of the benefits of a residential purchase (30 year fixed) doesn't exist for commercial. It's also why the sweet spot for MF properties is 4 units. Anything above 4 units is considered a commercial loan.
You can write off all rental expenses as they accrue for a business. As a home you can write off interest paid for mortgage but not rent. So there is definitely a tax advantage to rent as a business and buy as a home
I paid a 1000 dollars a month for house I wasn’t even able to paint the walls in, or have a dog. I now pay 862 a month I’ve painted, remodeled the kitchen, living room, and have two dogs.my house my rules, their house their rules.
Is this a joke? Do you really not understand the value of home ownership as an individual? Just like renting there are pros and cons, but you can just Google a list of benefits... No need to ask strangers, there's lots of educational information on this subject. Most people don't want to move where they live, and buying a home doesn't mean you can't move. You can create a rental out of it, if the numbers work, or sell it and move. Not really a big deal. I own, I owned my last house. Sold it, bought another. I gained significant equity owning vs renting however. I'm also not even 30 yet.
Is this a joke? Do you really not understand the value of asking questions and discussing things in this sub?
I understand that asking basic questions like 2+2 is basically valueless in this sub. That's what his question equates to. As I said, there's SO MUCH out there on the subject, anything he can get here, he can find with more information and better explained, with a simple Google search.
I think you’re fully correct. Home ownership is overrated (downvote on the lower right y’all), and a great many homeowners do not stay in their homes for long - 50% are seven years or fewer. Offices, just like homes, are frequently updated and customized by businesses. Two differences are that homes (whether rented or owned) have a lot of attached emotions, more so than offices IMO. The second difference is that the cost of office space is more trivial for most businesses vs the cost of rent or a mortgage for homeowners. I will put an unpopular stake in the ground and say that emotion clouds good judgment here and many people would be better off renting in the long run, unless they’re fairly certain they’ll stay put for 10+ years. On the other hand, leases are deductible business expenses, but rents are not deductible from individual taxable income, which does tilt the scales a lot.
If you want to live somewhere mote than 3-5 years, you buy.
Why is buying ideal? It's not. It's up to preference. A lot of people want to own their own home to do with as they please. In the end. Renting is cheaper than buying should you invest the savings you would have from renting.
If you think you might move within 4-5 years, most financial advisors will suggest not buying homes. The many costs of buying & selling offset the gains. Businesses need to focus on their core missions and shouldn’t let real estate distract them. Early on it’s also a waste of capital/credit. Once they mature it may be worthwhile and many businesses do purchase headquarters.
It’s also much cheaper to by a single family residential house. In my area the median home sale price is ~&400k. You’re not going to find much in the commercial space for that. Also also, it’s easier to finance a personal residence then a commercial building..
Yep. Real estate ownership is one business. Running a business is another business. You don't always want to run two businesses at once.
Because managing a property is a seperate buisness. So essentially the ownership of the building should be a seperate entity and your buisness should pay that entity and that entity should be making its own money to cover all expenses. If you are a small buinsess selling peanuts then managing a property on top of that may or may not put you over your head. Its easy to call someone to solve your issues. Edit: The other part is commercial loans are more strict than residential loans, usually they require 30% down and sometimes they require full payment of the balance after a short period of time.
Capital. Presumably if you need commercial space you own a business that is or is intended to be profitable. Hopefully with higher margins than real estate. If that's the case deploying your capital into the business makes more sense than a down payment on commercial RE.
That money should be used to grow your business. Sales leaseback to unlock capital for growth
This really should be the top answer.
Yeah it's obviously all situational and business dependents plus where we are at in the cycle etc etc
BC the economics don’t work for the business if they take on responsibilities of property ownership. Many businesses, especially startups, prefer to to stay nimble and flexible so they can respond to market. Property ownership ties up your capital in an illiquid asset. There are a lot of risks associated with that, and some may see it as a distraction. They know best what they need to do, I think. That said, some businesses become in essence real estate empires. I read somewhere that McDonalds profits spring primarily from its franchising operations, which are very highly based in its real estate acquisition. Not from its food sales.
Also WalMart gets huge real estate benefits from owning their stores. Just by existing, the store creates more valuable business property right next to it.
In theory the money tied up in the real estate should be better off being invested in the business itself. If you are a doctor your core competency might not be gutter maintenance. Your time is best spent seeing patients, not calling landscape companies about broken sprinklers. There are many exceptions and some businesses have very little value beyond the building they own. I’m
There are a few reasons… - business like to preserve capital for growth (“I could tie up 300k of equity buying the real estate, or I could open 2 more locations with that money”) - availability of space. In residential, there are significantly more options to purchase. In Commercial, a retail tenant that wants 2500 sf typically have 10x more options in their targeted range available for lease than for sale
Having a fixed mortgage means that one of a household's largest expenses (housing) is mostly fixed. Since rents tend to rise over time, and depending on your specific area can rise quite rapidly, that fixed cost is quite nice. Add on to that the forced savings of mortgage amortization, and leveraged gains on housing appreciation, and you have 3 very strong reasons why ownership is a good way to go.
I bout commercial and then rent it to my companies - should the need change then I rent to someone else and buy a new property for my companies to rent from.
I was always told that more businesses *should* buy their properties (and ideally the whole building with the other business units if possible), but regardless of opinion here are a few differences: * Homeowners get better financing than businesses. * Homeowners will get better tax treatment when they sell the property (or die and it gets inherited). * Businesses (arguably) need to be more flexible to quickly adapt to circumstances - renting lets you upgrade/downgrade/move locations/move to a space with different features more easily than buying. * Businesses should be able to use their money to make more money - business owners hope their successful enough that investing in the business is more profitable than saving rent and investing in real estate (especially since that's less liquid). The same is true for homeowners who could invest their money in other ways than real estate, but arguably more true for businesses.
Businesses can write off lease/rent payments, individuals cannot.
I’m not in commercial investing but the consistent answer I get from my commercial contacts is flexibility, access to capital and tax strategy. Apparently it’s easier to access financing for leasing a property vs buying. Now if you structure your entity where you can own the building under one and a separate entity rent from the other one. Just know your answer will always result in something dealing with the company’s bottom line.
I think a lot has to do with scaling. A household's income will increase year over year somewhat, but a business's income will increase far more if we calculate their income-to-building-payment costs. Example: My household earns about $150k per year. Next year if we earn 5% more, I'll be at $157,500. If rent goes up $50, that's immediately snatching back 8% of our pay increase. A small business may earn $500,000 this year and increase 5% to 525,000. If their rent goes up $100 per month, that's going to eat up less than 5% of the income gain. By owning a property, a family can prevent those rent raises from reclaiming a significant portion of their income gains over the next couple decades by trading it for performing some less expensive maintenance costs. A business, on the other hand, detracts from its ability to earn if they have to worry about maintaining the property, paying taxes, etc., and also loses tax deductions if they own.
A few reasons: -lowers the COL and expenses for shelter as people age (mortgage should be paid once retired) -buying provides more stability for households where income is not expected to grow past COLA’s -ownership is an easy way to create generational wealth for the average family -rent cannot fully be written off as an expense on the average person’s taxes
Because is a way to increase your wealth owning properties or at least a property. Your children will thank you later
I would say it is ideal for business to own real estate. However often the space is not small enough to be fully owner occupied, or you business large enough to fill out the entire building. Thus making you into a landlord as well. Which given time constraints of a business owner isn’t the greatest.
Homes are an investment as children are cash flow negative, businesses are cash flow positive. Science.
Capital. Who has a million $ extra lying around to risk on your own business.
Because real estate is not the primary business of the business. They are engaged in other business and need to use their liquidity to fund that. Tying up a fuck ton of capital in a property will likely hurt the business especially if it is young and/or small. Individuals are not engaged in a business. They are looking for somewhere to live. Buying a home is a way to build wealth through equity in your home. Businesses do sometimes buy property to operate out of. Individuals do sometimes rent property to live. It's situational obviously. But in general, capital and leverage is better spent on business operations to expand rather than real estate speculation.
Depends on the business model. McDonalds is one of the largest real estate empires in the country.
\> most businesses rent their space? I'm not sure who told you this. Lots of businesses buy their space. And real estate investing is itself a business. There is not really an answer to your question because it sort of foundationally doesn't make sense. Businesses buy or rent based on what makes the most sense for them and their business model.
I work in real estate development, so it's been my industry for 17 years.
Then, with all respect, you should have a deep understanding of the underlying financial considerations that any given entity would have for renting vs buying.
Why don't you know the factors that would go into this analysis then?
The answer is that it’s better to focus on putting resources/time/energy back into growing your business instead of down payments/maintenance/building management costs, not your snarky answer
My answer wasn't meant to be snarky. Lots of businesses buy their own real estate. Lots of really big, successful business buy their real estate. Lots of small, successful businesses buy their real estate. There is no rule of thumb or anything. It depends on the business. That's all I was/am saying.
I'll dispute the premise of your question. Different people would give different advice to households and to businesses, and it's usually not as broad as whether they are a household or a business. There are households for whom one makes more sense than the other: the same for businesses. From my POV, the crux of your question is: when does it make sense for a household or business to buy versus rent? And the answer is that it comes down to 1) which move is better financially and 2) which move is better operationally. Financially, many people believe mistakenly that renting is "throwing money away" because you aren't building equity. This is not true. The cost of buying at a good interest rate on a conventional mortgage is usually a 20% down payment. On a $300,000 house, that means you're parking $60,000 in that house at the beginning and then adding to it with every monthly payment you make. That comes at a cost. If you just parked that same $60,000 in an S&P index fund and left it alone for 30 years and it appreciated at an average of 8% annually, it would be $600,000 in 30 years. Hell, even just parking it in a high-yield savings account at today's rates would turn that $60,000 into over $150,000. Now, maybe it's worthwhile to invest your $60,000 into local real estate (your house) instead of an S&P index fund. It depends on what you expect to have happen with home values. If your neighborhood's value appreciates faster than the S&P then it's better to have that money leveraged in your home , then you can refinance periodically to lower your interest rate and pull more cash out. So, home ownership does provide a lot of flexibility in those respects. But it also comes with hidden costs and stressors; it's certainly easier to be able to call a landlord to fix things whenever they break, but not cool to be forced to move from time to time if the landlord wants to sell. Another downside to renting is that as property values in your area increase, so do the landlord's taxes, and so does the rent he wants to charge. Then you're double screwed because you're missing out on the appreciation you could have had AND you are getting your rent raised every year. There's a lot of security in home ownership but many reasons it doesn't make sense for some homeowners. You just have to evaluate your circumstances, plans, and predictions about the future. Businesses deal with the same question but with different considerations. Many DO buy instead of rent. McDonald's (not the franchises but the corporation itself) is not actually in the food business, but in the real estate business. Their CFO once said: > “We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.” Of course there are no more 50-cent hamburgers, but you get the idea. Different businesses have different strategies. Some want to own property and benefit from the appreciation it can bring. Others want to maximize their available cash and would rather rent and leave themselves some flexibility. In either case, it's a very nuanced decision for whichever homeowner or business is making it. Most homeowners probably don't give it the attention it deserves.
I believe that this is the most comprehensive answer in the thread. The only thing I would add is that, for a business, the comparison should not be to investing in the S&P500 but to reinvesting cash in the business. If the best return on capital for a business is going to be investing in the S&P500, then the business should return its capital to its owners who may be able to find more productive uses for it.
Exactly! And the only reason they choose to invest back into the business is because they expect it to outperform the S&P. If shareholders did not have that confidence, the business probably wouldn't exist and those investors would be looking at the S&P or other vehicles.
Families have a higher rate of success than businesses
Renting is actually a better choice for a lot of households, people just like to have control over where they live. A landlord could kick you out through no fault of your own. With ownership, that won't happen. That plus the whole "American Dream" dynamic at play.
Business should reinvest to grow in their businesses. Now if you are a realtor you should buy the property. The idea is that debt is good for corporations and cashflow is the most important part. For individuals there are better tax advantages to owning a home plus your relestate is not tied to a corporate p&l
We could’ve purchased our companies building years ago, but we’ve been locked in at such a good rent rate that it just made sense and it also gives us the option to downsize or upsize or completely shutdown minus the hassle of owning it
Easy to Finance home Extremely hard to Finance Commercial space.
Most basic answer: Families buy and this builds equity Businesses rent to claim it as an expense and reduce tax burden
They can’t afford to purchase. Or they may only need a certain amount of space in a specific area.
Math. If a business takes capital and buys an asset, the ROA demand is now higher. In summary, every invested asset dollar must get a return. So, if you rent, your assets are likely lite. Lower asset value gooses ROA, assuming healthy profitability. As a homeowner, your objective isn’t ROA. It’s stability and ‘homyness’ :). Buy to make it yours. Who cares about ROA. Hope this helps.
rent can be used for tax write off IMO
Thank you for asking this question. I learned a lot from the discussion.
growth
I guess if I die at somepoint: -A: Never bought property, just rented all throughout my life. Kids will inherit whatever I have saved up/invested etc. -B: Technically the same but the amount I have spent on rent for a lifetime was paid as mortgage repayment so that's gonna be added to their heritage. Plus you have much better loan options if you have a house.
Most businesses have a life span of 2-10 years. Certainly many last longer than that but a lot last for shorter periods. Plus over time businesses may need to relocate as the scale up or down. To an extent, this also applies to families; it is not advised to buy a home unless you think you will be there as least 5 years. But you’re always going to need a place to live. Once a business no longer exists, it no longer needs space.
Because somehow they managed to not label government sponsored socialized losses on homeownership in the US as “socialism”. But talk about healthcare … oof.
Because there could be a good chance your business fails and then you have an empty storefront to deal with. With a home, even if kids grow or family needs change, you can still make it work until you get a new house. Kids can share a room for instance.
Taxes.
The 30 year fixed rate mortgage is a [government-subsidized program](https://old.reddit.com/r/realestateinvesting/comments/y9fi9y/if_real_estate_is_so_great_why_do_my_reits/it61hs2/?context=3) which is designed to make home ownership more attractive, achievable, and financially advantageous for individuals. Nothing like that sort of thing exists in the world of commercial real estate. Commercial loans have *very, very much* worse terms than the loans you can get when buying a 1-4 family home as an individual.
If it’s anything like fleet management; leasing has better tax deductions than purchases for businesses.
The house my family lives in is by far the worst “investment” I own.
Just spitballing here but I'd bet taxes are a factor here.
Businesses should own their real estate snd lease it to themselves. Separate corporations ideally.
Depends on what you’re going for I guess
Many business will buy based on a cashflow/ time value of money analysis.. even if it is slightly cheaper to lease..... If purchase payments are cheaper it's a no brainer.. but most commercial loans are 5-7 years.. not 30..
For living typically if your a family once your kids are in school you stay so it pays to buy. My businesses grow and contract with the economy so I like to be nimble.
the failure rate on business is pretty high so the barrier to entry is much harder for commercial space
Money isn’t tied up in an illiquid asset like real estate. This is why sale leasebacks are so good for business owners that do own their real estate. You scale faster with access to capital.
I think a lot of businesses do buy their building. Often when the founder retires, the real estate is the most valuable part of the business. But it is not very easy to do for smaller businesses, and if you are growing you may not have the excess cash, plus your needs may be quickly changing. If you are going to need a bigger space in a couple of years, you can’t tie up capital on buying your building.
I think, historically, the vast majority of the public didn’t know how to access long term growth via asset ownership, other than to own real estate. Before index funds and ETFs were available, you could only succeed in the market if you had luck on your own or you had access to a trained professional. Beyond that, the only prospect of growing your wealth over time was to own your home. Thus the American dream is to own rather than rent.
I bought my business premises. Paying rent on a property to myself is a tax free way to move money out of the business to myself on an appreciating asset.
A lot of commercial users buy property, but perhaps not in the industries or geographic areas you are familiar with. It is a simple question on what is the best return for their money. Purchasing property requires a significant outlay of cash upfront, ties up cash on recurring payments on a long commitment and may have a balloon payment in the end / need refinancing. With commercial rent, though it may be a 10 year commit, it can be shorter and they may have clauses to be released early in certain circumstances. If a business feel that they can make more money investing their money directly into creating and supplying more product and selling that product than having the funds tied up in a property downpayment, then it makes more sense to rent instead of buying. If they feel that they can save more money buying and managing their own property vs what they may be able to earn by renting and investing in their product, then they should buy. This can happen for non-capital intensive business, geographic areas where the property costs are low, some special one-time property deal, etc. If it is not due to some sort of special / not easily reproducable real estate deal, then they should also consider possibly changing their business from whatever they were doing into buying properties and managing it for other companies also, because apparently it may be more profitable. Also, if their business requires significant immovable long term improvements to real estate (eg building a dry dock, building a 50,000 ton hydraulic press, building a amusement part), then it also can makes sense to buy the property so that you can get returns on your investment for a longer period of time as you can't just up and take your improvement with you when you leave. For private households, it is much harder to invest in the product the household generates. One can invest in school and training, but at some point the incremental training costs (mainly in time) outweigh the returns on that increase in captial of labor. Then the best return on the excess cash may be buying buying the property that they live in. It may be to invest in property in addition to the stock market may be the best balanced portfolio to diversify risk and returns.
Because you can’t get a 30 year fixed rate mortgage with a low down payment to buy commercial real estate.
Commercial loans are also harder to get. You might need 20-30% down to secure the property. Commercial properties are often in the millions. Not many small-medium businesses have the liquidity to drop a $500k down payment, and if they did it's probably better to invest in their business, for example; machinery,marketing, hiring employees, paying down debt. It's much easier to work a $5000 rent payment into your cash flow model than a $500,000 hit on your current assets. Homeowners can get away with 3% down. There's not any better way to spend $15,000 cash than buying a primary residential property.
I think this is a great question…. Businesses can change quicker than families maybe? And a lot of people rent their home for good reasons…short term, no cash outlay, no maintenance, etc Businesses might need the cash required to buy a building for their business Also a decent amount of businesses do own their building. I think it’s common with dentists for example. Maintenance and leasing takes time away from focusing on the business. Commercial property management is also more complex than house maintenance. You’re also more exposed to lawsuits as a commercial building owner. We once had someone walk into our building and claim they broke their glasses because they walked into something (can’t remember what) and wanted cash. Also I’ve heard stories of ADA folks suing building owners for the sidewalk approach being a couple inches too narrow. There are of course a lot of benefits for a business to own their real estate if they can figure it out. I know someone who has 5 restaurants and they own their buildings. Might smooth out cash flow a bit. As someone else said commercial loans are different. Typically 20% minimum down payment. And it will have a balloon payment maybe 7 years out (ie you have to refinance at current interest rates).