Every business owner has a choice of operating either from a leased property or purchase own commercial property to run the day-to-day activities of the business. For a business that need regular cash flows and have just started operations leasing a property would be a better option. On the other hand for an established business with string financial statements, operating out of owned premise will be a more feasible option. This will not only give a tax benefit to the business but also lay a strong foundation in future growth of the business.
Following are advantages of owning a commercial property to list a few:
Support in cash flows
A commercial property that has space not only to run your business but also to accommodate one or more tenant will generate regular income in the form of rent. Though it might also involve regular payment to the financer as EMIs but this can be largely compensated by rental earned every month. But an owner should always remember not to deviate from the core business and consider rentals income as secondary only.
Historically proven Equity appreciation
This is a proven fact that commercial real estate gives excellent appreciation in value as compared to other assets or even residential real estate for that matter. For a business, real estate equity helps leverage growth with more flexibility without putting the core business at risk. This allows the owner to raise the debt on the asset which might be up to several times the value of the asset (here Commercial real estate) itself. In fact, even after the owner decides to retire, the property will continue to generate income for him in the form of rent.
Owning a commercial property also gives the benefit in the form of tax savings. Interest paid on the mortgage amount & the depreciated value covers a large portion of Tax charged on income. It is advisable to hire or consult a financial advisor of Chartered Accountant before purchasing a commercial property in order to reap all related tax benefits.
Owning a commercial real estate gives security to the business owner. First of all, it gives security against any rent increases. This rent acts as a dent on income from the business. Secondly, value of commercial real estate is not as volatile as other investments. Thus, it gives the owner a security of return on Investment.
Hedge against inflation
Real estate investment is known to be the highly correlated to inflation as compared to other assets like bonds etc. It works as a hedge against inflation. With the increase in the rate of inflation cost of properties with high labor & replacement cost, also increases. Rise in the inflation rate might lead to increase in rent also. In the case of leased property, the business will suffer a dent on income with the pressure of increased rent. Whereas in case the property is owned, he will enjoy the increased value of the asset even during high inflation.
Contributes to company’s overall image
A business set up in an owned commercial real estate depicts stability and easily wins confidence of investors. It connotes the strength business has to ride through the period of recession and grow in the future. Thus owning a commercial real estate contributes to the overall image of the business and indirectly to the profits after tax.
It is a proven fact that the addition of a real estate in the asset portfolio reduces the risk exposure. The returns of real estate & other financial securities are negatively co-related. Such negatively co-related assets in the portfolio give a diversification to the systematic risk in financial portfolio. Such diversification helps in earning the same percentage or even higher returns with the same risk involved.
Amongst the other benefits of owning a commercial real estate and running your business through it, one of the most important and nontangible benefits for an owner is the pride and confidence of owning a commercial property. The sense of owning a property value of which will increase with time and which is expected to yield results even after business is not that profitable with also add to the owner’s confidence for years.
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