My wife and I, along with the mortgage company, own our home out in rural Hinds County. The Mississippi Business Journal owns, again, in partnership with our bank, the building where we do our thing. One could correctly conclude that I believe real estate to be a good investment.
Why do we invest in real estate? Perhaps we enjoy the aesthetics of the neighborhood where the property is located and the style and layout of the building. Perhaps the lure of healthy investment appreciation is appealing. And then there’s always the fear of rent going up and up and up.
Finally, for homeowners, anyway, there are the tax deductions for mortgage interest and taxes while renters get no tax relief.
Pros and cons
In my view, all of these aspects of real estate ownership are valid. Historically, real estate does appreciate in value year after year. The tax deductions for homeowners are real and important. Enjoying the location and aesthetics of home and office is a quality of life factor. All point toward the wisdom of owning real estate.
Are there any disadvantages to real estate ownership? Yes, there are. The old axiom of real estate value being tied to location, location, location is true. It’s also true that, since real estate is permanently located in one spot, it can’t be moved anywhere else. Thus, if the neighborhood changes or the needs of the business change real estate is still right where it was when we bought it.
For a business, investing in real estate and operating the business are two separate things. Owning the real estate can hamper decisions about the most advantageous location for the business. In a sense, owning the commercial property where the business is located is a ball and chain on the foot of strategic planning. The necessity of staying where the office is located, whether advantageous for the business or not, is somewhat akin to the tail wagging the dog.
Perhaps a better option would be to rent the space where the business is located and invest in other, similar commercial property to protect against the downside of ever escalating rents while offering maximum flexibility in putting the business where it needs to be.
Theoretically, as rents increased in one place they would also go up at the other and, thus, the additional rental income from the property investment would offset the increased rent for the space occupied by the business.
And the house?
I suppose this analogy could be expanded to home ownership, though I don’t think it’s as valid for homes as for commercial property. Deciding on a home is much more about personal considerations and less about business strategy. I suppose that for someone planning to retire to a different location, there is some validity in buying the retirement home and renting it out during the working years. Perhaps buy both homes, rent one out and, upon retirement, use the profits from selling the primary residence to pay off the mortgage on the retirement home.
Well, it’s food for thought anyway.
Mixing it up
In summary, owning commercial real estate and operating a business are two separate ventures and by combining the two, strategic options are limited. The world is moving very quickly and businesses may need the flexibility to respond to changing circumstances without taking away the option of relocation.
And, though there’s no “one size fits all” rule for choosing whether to buy or rent, owning real estate in some form is wise asset allocation.
Thought for the Moment
Friendship is a plant of slow growth and must undergo and withstand the shocks of adversity before it is entitled to the appellation.
— George Washington (1732-1799)
Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at email@example.com.