Just which business are you in?
Thursday, February 8, 2007/
Instead of owning your business premises, imagine how much growth that money could generate.
I called a guy the other day to get some help on a technology problem. He is in the technology industry. He said he couldn’t meet me because he was off to see an estate agent to pay a deposit on a $1.4 million property he had just bought for the business.
I asked him if he had gone into the property business, and he said: “Definitely no. I am buying the property for my business.”
Quite a few people use their business assets to buy property for the business, but it is always worth asking whether it is a good idea to have all that money tied up in property rather than invested in the business.
My friend said his business premises had appreciated in value by 25% since he bought it several years ago. Had he ever calculated how much income he might have generated by investing that money in his business? He hadn’t.
It doesn’t hurt on occasions to learn from the big boys. Westfield invests in property and IBM rents property because it is in the IT business, not the property business. It makes a lot of money out of the IT business and Westfield makes a lot of money out of the property business.
Now, I suppose that if you have loads of spare cash and you simply want to make an investment, property is not a bad investment medium but it still poses the question: Why would you invest in property rather than your business?
If the answer is that the business does not require any further investment, then you are really in record-breaking territory.
Unfortunately, many businesses that invest in real estate do so by leveraging their assets and often to such a level as to put pressure on their cash flow.
The result is that they have not only invested in a business that is not their core business but they have created pressure on cash flow so that the business becomes cash starved and can’t expand as quickly as one would like. Sometimes, the demands for servicing property debt actually create serious, if not terminal, cash problems for the business.
So, before you rush off to buy the next property for your business, just be sure that you are not going to starve your business of the cash that is always so necessary for growth.