The Business Owner's Guide to Investing in Real Estate

The Business Owner’s Million-Dollar Reinvestment Question: To Buy or Not to Buy Real Estate?

Picture this: You’re running a successful business, and you’ve just closed a great quarter. As you review your bank balance, that familiar question creeps in: “What should I do with this extra cash?” It’s a good problem to have, but it can keep business owners up at night.

For many entrepreneurs, real estate quickly becomes the answer that feels right. After all, who hasn’t thought: “Why am I paying $15,000 a month to my landlord when I could be paying that to myself?” It’s a tempting logic – you’re already paying for space, so why not own it and build equity while you’re at it?

But here’s the thing: just because real estate has been a good investment historically doesn’t mean it’s always the right move for your business. We’ve seen too many savvy business owners stumble into real estate purchases that looked good on paper but ended up draining their resources and distracting from their core operations.

The truth is, the decision to buy real estate as a business owner isn’t just about comparing rent versus mortgage payments. It’s about understanding whether that investment serves your business strategy – or if it’s simply a case of “grass is greener” thinking.

That’s why we’ve developed a simple framework to help you navigate this complex decision. It starts with two fundamental questions:

Does your business actually need specialized real estate? (Think manufacturing facilities with custom equipment or medical offices with specific regulatory requirements)
Is this property a good investment on its own merits? (Would you buy it even if your business wasn’t involved and do you have the skillset (and time!) to execute?)

These questions might seem basic, but they’re the foundation of a smart decision. Too often, business owners skip straight to calculating mortgage payments without considering whether they’re solving a real business problem or creating a new one.

Let us show you how this framework plays out in the real world through three different business scenarios. Each one reveals a different path (and different outcomes) when it comes to the rent-versus-buy decision.

Example 1: Software Development Firm – The Rent-Saver Trap

Service business with no specialized needs facing a poor investment

Let’s meet Robert, who owns TechSolutions, a $5M EBITDA software development firm with 30 employees. He’s tired of paying $15,000/month in rent (triple net lease where he also covers taxes, insurance, and maintenance) and found a $2.5M office building for sale.

The math looks tempting at first:

Purchase price: $2.5M
Down payment (25%): $625,000
Loan amount: $1.875M at 6.5% interest
Monthly mortgage: $11,847
Annual property costs: $45,000 (taxes, insurance, maintenance – which he’s already paying under his triple net lease)

Robert thinks: “I’ll save $3,153/month and build equity!” But here’s a deeper look:

Annual NOI (net operating income): $180,000 (based on $15k * 12 months, the same rate Robert pays a landlord today). (Note: Typically property management fees of 3-5% would be deducted, but we’re assuming Robert self-manages as the only tenant)
Cap rate: 7.2% ($180,000 NOI ÷ $2.5M purchase price)
Annual mortgage: $142,164
Annual cash flow: $37,836
Approximate 10-year IRR: 8.4% (assuming 2% annual NOI growth and exit at same 7.2% cap rate)

But wait – this analysis excludes any major maintenance needs. In reality, commercial buildings commonly require unexpected repairs and updates. A $15,000 surprise for a new HVAC component, roof repair, or plumbing issue isn’t uncommon.

Conventional wisdom is to budget 1% of the building value annually for maintenance. To be optimistic, we’ll reduce this to $15,000 unexpected maintenance expense every two years (years 2, 4, 6, 8, and 10). Here’s how the financial picture changes:

Annual cash flow in “normal” years: $37,836
Annual cash flow in “maintenance” years: $22,836
Revised 10-year IRR: 7.1%

The verdict: Robert’s business doesn’t need specialized space – any well-equipped office works. The 7.1% return is fine (but not at all compelling compared to other investment alternatives), and once the realities of building ownership are factored in, he’d very likely earn more money with less headache by focusing on expanding his company instead.

Bottom line, there’s no business case and the expected return relative to other investment options isn’t compelling – this is a pass. So what’s a scenario that could make sense for Robert?

Example 2: Same Company, Different Opportunity

Service business finding a genuine investment opportunity

Now imagine Robert finds a different property:

Multi-tenant office building: $3.5M
Building size: 15,000 sq ft
Current situation: 9,000 sq ft leased generating $337,500 in rent annually ($37.50/sq ft), but a 5,000 sq ft tenant is about to move out, creating a distressed situation
Current NOI: $337,500 – $45,000 (expenses) = $292,500
Cap rate: 8.36% (prior to 5,000 sq ft tenant leaving)

The reality of the building already having a high vacancy that’s only going higher creates an opportunity. Robert can take over the 5,000 sq ft space of the tenant that’s leaving and then work to lease out the remaining 6,000 sq ft. Here’s the deeper dive:

Down payment: $875,000
Loan amount: $2.625M
Robert’s TI costs for his 5,000 sq ft space: $350,000 ($70/sq ft)
TI allowance for vacant 6,000 sq ft: $420,000 ($70/sq ft)
Total initial investment: $1,645,000 (including down payment and TI costs)
Current NOI after tenant moves out: $150,000 (4,000 sq ft remaining tenant)
Robert’s implied rent (5,000 sq ft at $37.50/sq ft): $187,500
Potential additional rent from vacant 6,000 sq ft: $225,000
Property management costs for 10,000 sq ft of tenant space (5%): $18,750
Potential total NOI when fully leased: $543,750
Annual mortgage (at 6.5%): ~$199,800
Initial annual cash flow: -$49,800
Potential annual cash flow if fully leased: $343,950

But like in Example 1, we need to factor in those unexpected maintenance costs that are part of building ownership:

$15,000 unexpected maintenance expense every two years (years 2, 4, 6, 8, and 10)
Annual cash flow in “normal” years: $343,950
Annual cash flow in “maintenance” years: $328,950
Approximate 10-year IRR if stabilized at full occupancy: 13.7% (factoring in both the $770,000 in tenant improvements and periodic maintenance costs, assuming 2% annual NOI growth and exit at same 8.36% cap rate)

Reading this example probably gets you excited about the return potential. The problem? Robert is a tech entrepreneur, not a real estate entrepreneur. Here are the real challenges that exist outside of the spreadsheet:

Time – Robert’s time is allocated much more effectively growing his business relative to managing his new office building and ensuring he has tenants keeping the space full
Upfront cash need – the real estate investment requires upfront capital. This capital could instead be used on additional growth initiatives within the business (likely higher return) or other passive investment opportunities outside of the business (significantly less time required)
Reduced flexibility – while he has control over his space, his ability to flex his business up and down based on the market is significantly more limited – he has to work around existing tenants to scale up or find tenants to fill vacated space when he scales down
Market exposure – the sub-market the building is located in will significantly influence his economic outcome. Will the area population grow with new businesses coming in or experience net out migration and have vacant office space in 10 years?
Concentration risk – the single property ownership creates significant concentration risk. If just one of the tenants vacates the building and it takes time to backfill the space, investment returns will be significantly impacted. There is very little diversification achieved within the tenant base (unlike multi-family with many tenants)

Bottom line, this will be a major distraction from the core business. The potential return makes it worth evaluating whether this project fits Robert’s overall goals and skillset to pull off, but the evaluation needs to go beyond the spreadsheet math to incorporate the overall time, capital, and opportunity cost of the real estate investment.

Finally, let’s check out a totally different situation where an owner has a specialized business need for the real estate and how to think about evaluating the project.

Example 3: Precision Manufacturing – The Build-to-Suit Case

Specialized business requiring custom real estate

Meet Anna, owner of Precision Tools Inc., a $5M EBITDA manufacturer facing limitations:

Current facility: 25,000 sq ft, $25/sq ft rent
Needs: 40,000 sq ft with specialized features
Options: Build custom facility for $8M or keep leasing

Build-to-suit analysis:

Land and construction: $8M
Specialized features:

– Clean rooms: $750,000

– Custom power infrastructure: $500,000

– Climate control systems: $300,000

Total investment: $9.55M
Annual market-equivalent NOI: $1,000,000
Current EBITDA: $5M
New EBITDA with 60% capacity increase: $8M (+$3M)

Breaking down the combined IRR calculation:

Real estate component

Initial investment: $9.55M
Annual NOI: $1,000,000
Annual cash flow after debt service: $380,000
Property value after 10 years (at 6% cap rate): $13.4M
Real estate only 10-year IRR: 9.7%

Business value creation component

Initial business value (at 5x EBITDA): $25M
Annual additional EBITDA: $3M (conservatively assuming no efficiencies/economies of scale so EBITDA grows proportionally with new space)
New business value after expansion (at 5x $8M): $40M (and likely higher with multiple expansion that comes with the larger business)
Business value increase: $15M

Combined investment analysis

Total investment: $9.55M
Annual returns: $380,000 (real estate – paid to self but could rent to market) + $3M (business) = $3.38M
Terminal value: $13.4M (property) + $15M (business value increase)
Combined 10-year IRR: 24.3%

Strategic benefits:

Production capacity increases 60% to expand business cash flow and valuation
Competitive advantage through specialized infrastructure
Total wealth impact significantly exceeds the pure real estate ROI

Even with a 9.7% return on the real estate that we wouldn’t view as good enough for a development project, Anna’s specialized needs, capacity-driven EBITDA growth, and business valuation increase create a compelling case for ownership.

Key Takeaways for Success

Define Clear Goals: Is this for operational necessity or investment returns? Don’t confuse the two
Run the Numbers Honestly: Compare real estate returns against:

– Business reinvestment opportunities

– Alternative real estate investments that won’t require so much time and effort

– Other high-return investment opportunities (private equity, infrastructure, etc.)

Consider All Costs: Include property management, maintenance reserves, and opportunity costs
Leverage Strategically: Real estate debt can be cheaper than business debt, but don’t over-leverage your core operations. Also, real estate financing often offers non-recourse options that may not be available to your business directly, providing additional asset protection and financial flexibility.

Remember: Just because you can buy real estate doesn’t mean you should. As an entrepreneur, taking the time to understand the opportunity cost of each decision is fundamental to allocating your time and resources appropriately. The best decision maximizes your total wealth and business goals, not just your property portfolio.

If you’re curious about your business’s transition readiness, take our free COMPASS Score assessment to identify key areas of opportunity.

Panoramic Capital Partners (“Panoramic”) is a registered investment advisor.

The information provided is for educational, informational, and illustrative purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Panoramic Capital Partners and its advisors do not provide legal, accounting, or tax advice. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. This article may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

The above targets are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.

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