Be Your Own Landlord

Firstly, you may have noticed I took last week off as a Spring Break, and also because we travelled to France to do a one month French Immersion class. No sooner had we arrived that we tested positive for Covid. Just shoot me. We stayed clear of it for two years and now we are here and can’t go to class. C’est la vie. I have plenty of time to write!

I want to talk about owning your own real estate for your brewery. A good friend and brewer is trying to buy his building and I have been going through the numbers with him and thought this is a good topic to breech.

Now, you don’t need to own your own building. I think of that as a separate business venture. Of the fourteen businesses I’ve owned, only in three instances did I also own the buildings. But if you could own both, it gives you two separate business ventures but you only do work for one. Because once you own the building and operate the business, there is nothing you really need to do for the building, just operate the business. However you financially benefit from both.

Let’s say that you could buy your building for $500,000. You are currently paying rent of $4,000 per month plus property tax, insurance and common area fees (this is called triple net). Your brewery has no problem with rent and the landlord doesn’t have to pay for the property tax or insuring the building. Typically however the landlord is responsible for the roof, foundation, and walls.

In order to buy the building at $500,000, you need to come up with 20% down, or $100,000. At this point you may say to yourself, “hell I don’t have that kind of money, I’ll just skip it and keep on renting.” Hold on cowboy, you need to scrape this money together and let me show you why.

A loan of $400,000 at, let’s say 4.5% for 15 years, comes out to $3,060 per month. So right out of the gate you are ahead by almost $1,000 ($4,000 - $3,060). Remember as a building owner you don’t have any extra expenses because the tenant - the brewery - is paying property tax and insurance. That alone makes this a good deal for you. But wait there’s more!

Commercial real estate can be depreciated over 39 1/2 years, so each year you can deduct from your rental income that depreciation.

Commercial real estate “typically” appreciates as well. A conservative estimate could be 2% per year. In fact, by the real estate now being occupied by a successful brewery makes the building more valuable. So now you are also gaining in appreciation. But wait, there’s still more.

All the interest you pay for your building loan is tax deductible. This will save on the income from rents as well. This all comes down to a tax advantage to the income you earn on the building. It looks like this.

Instead of paying taxes on the $48,000 of income, your are only paying taxes on $20,897.

And finally the principal you pay (principal reduction) is basically income as well. If you start the year off owing $400,000 on your building (after your $100,000 down payment) and after twelve months of payments you owe $380,889, that $19,111 in principal payments is your increase in equity in the building.

If you take all the ways you make money on owning your building and divide that number by what you put down on the loan ($100,000), that percent is your return on investment. The cash flow is your rents collected minus the load payments. Here is what that looks like.

34.75% sure beats the stock market. Other than having to come up with the $100,000, which you could beg borrow or steal from everyone you know, you didn’t really have to do anything to make that 34.75%. All you do is go on living your life and running your brewery.

In conclusion, if you are offered the chance to buy your building, stop and look at the numbers before you discount it out of hand. I can say for myself, while the breweries have been profitable, most of the real money we have made over the past years has been through owning the real estate.

If you are interested in a cool spreadsheet that goes through this, send me a note and I will send it to you. A bientôt. Tom