You should buy commercial property only if the returns from your property exceed or equal the returns generated from your business. Else use the cash for growing your business rather than putting real estate into the economic profile of your business.

Purchasing the commercial property where the office is located is an enticing prospect, but it rarely makes financial sense. The typical returns in commercial property are lower than in running a business.

Some business owners may feel that commercial property can be purchased largely by taking a loan but there is a fallacy in this argument. Taking debt will take up debt capacity of the company’s financial profile. This debt capacity can be used for business expansion. In addition, the Profit after Tax (of Net Income) will also reduce because of interest payments each year. If the returns generated from your business exceed the returns expected from that commercial property, then you should instead take the loan to invest in the business rather than the commercial property.

 

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