In this episode, Erik shares the difference between leasing or buying a building for your business.
Erik J. Olson (00:02):
As a business, should you lease or own the building that you’re in? What is happening? This is Erik J. Olson. Oh, this is a great question. Okay. Look, financially, straight up financially, most financial pundit will tell you that as an example, owning a home is a bad idea financially. It doesn’t make sense. Now, as an example, the home that I’m in right now, I’ve lived there for almost 20 years. It has at least doubled in value in the last 20 years, which sounds great. Right? Sounds awesome. But it took 20 years to double my money. That is an incredibly low return on investment. What’s that like 3% a year or something like that. It took fricking forever. Oh. And by the way, I had to dump another, like how much I, how much I spent on the home. I, I put that amount in cash back into the home in order to add a pool, add a deck, paint the walls, replace the floors to upgrade it over and over.
Erik J. Olson (01:15):
So I’ve dumped a ton of money into the house. I waited 20 years and the reality is when I sell it, the reality is I’ll probably break even. And with, with, if, if I were to look at all the expenses, but then also with inflation, the effective inflation, and especially now like 9%, I’m way behind, way behind. But there’s a huge upside. In my opinion, it goes beyond finances. This is, I’m talking about a home right now. I get to, to a building in a second for a home. It it’s my home, right? This is it’s mine. No, I granted it’s really the banks and I have to pay the back, but it’s mine. I can do whatever I want with it. In the meantime, I mean, I can’t burn it down because the bank really owns it. I don’t, but it’s mine. <Laugh> all right.
Erik J. Olson (02:01):
So with switch that, that that’s like the financial discussion of home ownership. What about for commercial building? So here at Array Digital, the building that I’m sitting in right now on independence Parkway in Chesapeake, Virginia is owned by me personally, Erik J. Olson owns this building. Actually I have another LLC that I own, and the LLC owns this building, but Array does not own it. Array leases from my LLC, but effectively, effectively, Array owns this building right now. Array pays rent to Erik J. Olson. And then, and then Erik pays the mortgage. So in this situation, you know, I said before, effectively, Array owns it and that’s not true. Array has a landlord, which is my LLC, me. So in this particular situation, I was the business owner. I bought the building and then my company lease from me, was that a good idea?
Erik J. Olson (03:00):
Well, I mean, I think so. I think so right now I had to put some money down and, and I don’t have access to that capital anymore. I sunk money into this building, but I have a tenant and frankly, it’s a tenant that I feel very confident in because it’s my own company, right? I’m the one that’s running this operation here. And I mean, of course there’s a lot of other people, but this is my company. And I feel very confident this company’s gonna be able to pay that bill for a long time. So this benefits me a lot to have this building. I’ve had it for five years now. I have a 20 year mortgage on it. So in just 15 years, it’ll be paid off. It’s great right now, downside of owning this building is that I had to put money down downside.
Erik J. Olson (03:44):
Is that, I mean, I, I guess I could raise the rent, but I, I probably won’t, but I should, like, I should raise this rent to market value. Right? But then again, there’s a positive on the company side that the company is not there. The, I could charge more for this, this rent, but I’m not. So that means that the company is benefiting my partner. Kevin is also benefiting because I could keep the rent slow. As a matter of fact, for the first couple years, when we were very tight on cash flow, I reduced the rent by $250 per month, up to $500 per month, depending on how Array was doing. So as a personal investment, I was making way less with Array Digital than I would be if I rented to someone else. But the piece of mine was incredible. Now, a lot of businesses do not buy their own buildings and it doesn’t make sense.
Erik J. Olson (04:39):
And you probably should not have a, a company. Your operating company should not buy real estate UN unless you’re in the business of buying real estate. But like my operating company at Array Digital is a digital marketing agency. It is not built to own real estate. Most of the people in this company do not understand real estate investing. That’s not the business that we’re in, we’re in the business of digital marketing for law firms. So it doesn’t make sense for Array to own this building. It doesn’t make sense for Array to put its capital into this building. It should be putting its capital into client acquisitions and operations for digital marketing. So I don’t think that a company should directly ever own real estate. As a matter of fact, it’s a liability because now you have something could happen to this building. Someone who knows what could happen, right? It’s real estate and, any bad thing could happen. And, and it could affect the operating company. So at a minimum, you should have another LLC. You have your operating company that does whatever you do. And you have an LLC whose purpose is a single purpose, LLC. Meaning it’s O it only exists to own that real estate. And then one leases from the other just like added here at Array Digital. So your operating company
Erik J. Olson (05:56):
Should not own real estate, but what you could do if you want is take some of the proceeds, the distributions out of your company, build that up over time, use that as a deposit to buy a building in a different LLC, maybe even like, you know, something that just you own, and then rent it to your company that gives you security. That gives you predictability. That gets you into real estate investing. There’s tons of benefits. I won’t go into all those, but there’s appreciation. There’s depreciation for tax purposes. There’s cash flow. There’s a lot of reasons you would wanna do it. But I don’t think that as a company, that should be your primary goal. It shouldn’t be your secondary goal. As a company, you should not be as an operating company. You should not be buying real estate, unless of course your company is formed for the purpose of buying real estate. But most aren’t personal. You can, as another LLC, you can, as another business venture, you can, and you should, in my opinion, cuz real estate investing is great, but not as a company got any questions like that for me, hit me up on Instagram. DM me, your questions. I hang out there @erik.j.olson. That is E R I K dot J dot O L S O N.