Owning your auto shop’s real estate is a significant step that can offer long-term benefits. In the latest episode of Business by the Numbers, Hunt Demarest, CPA with Paar Melis and Associates, breaks down the process and considerations for shop owners thinking about this investment.
Starting your shop might have involved renting a space or even working from your home. As your business grows, owning the property can provide stability and potential financial benefits. However, it’s crucial to evaluate if you can afford this investment.
Key Considerations
1. Financing Options:
- Should you get a loan or consider owner financing?
- Understanding loan terms and amortization is essential. Commercial loans often come with different terms compared to residential ones, such as five-year balloon notes with 30-year amortizations.
2. Affordability:
- Assess if your profit can cover the increased costs. For instance, if your rent is $3,000 and owning the property would cost $6,000 monthly, you need to evaluate if your business can handle this.
- Calculate the additional sales needed to cover the extra expenses. A simple formula is to double the monthly cost increase to find the necessary sales increase, assuming a 50% gross profit margin.
3. Long-Term Benefits:
- Owning real estate can build equity and offer tax advantages.
- It provides more control over your business premises, eliminating the risk of rent increases or eviction.
Starting your shop might have involved renting a space or even working from your home. As your business grows, owning the property can provide stability and potential financial benefits. However, it’s crucial to evaluate if you can afford this investment.
Real-Life Example
Hunt shares an example where a client considered buying the building they rented. Initially paying $3,000 in rent, the cost to own would be around $6,000 per month. By evaluating their annual profit, they determined they could afford this investment, even factoring in a substantial down payment and a reasonable interest rate.
Conclusion
Investing in real estate for your auto shop can be a smart move, but it requires careful financial analysis and planning. By understanding your financing options and assessing your business’s financial health, you can make an informed decision.
For more detailed insights, listen to the full episode of Business by the Numbers On the Podcast Page or wherever you listen to podcasts. If you have questions or need personalized advice, email Hunt at podcast@paarmelis.com.
