Rent or Buy: How to Prepare Like a Pro
Turning Wrenches European Auto Repair Location: Louisville, Ky. Owner: Levi Johnson Average Monthly Car Count: 130 Total Staff Size: 6 Shop Size: 8,500 square feet Number of Bays: 11 Total Annual Revenue: $1.3 - 1.5 millionDubwerx Inc. Locations: Cincinnati, Ohio Operator: Ryan Clo Average Monthly Car Count: 260 Total Staff Size: 12 Shop Size: 11,000 square feet Number of Bays: 12 Total Annual Revenue: $2.8 million
To rent or to buy? The question poses an age-old dilemma that could leave you talking yourself in circles.
Shop owners mulling over one or both routes are no doubt familiar with the perks. Renting can help start-ups get off the ground with minimal cash investment, provide flexibility to grow while building capital, and keep many added responsibilities off an owner’s plate, while owning can provide more freedom and flexibility without being beholden to a landlord, as well as a chance to diversify your assets.
With pros and cons to each, your decision will likely be determined by individual factors like financial fitness, location, and long- and short-term plans, and cash flow, but what should you keep in mind along the way? Levi Johnson, longtime renter and owner of Turning Wrenches in Louisville, Ky., and Ryan Clo, a Cincinnati-based multishop owner in growth mode, share the considerations they advise keeping top of mind.
Get it in Writing
When Johnson opened his first shop, he rented from a less than formal landlord. While he rented the building for seven years, only the first two were on the books.
That initial two-year lease was critical in helping Johnson secure financing, but the five years that followed were stress-filled. At any point Johnson’s landlord could have given him the boot with just 30 days notice. As a now seasoned renter, Johnson recommends locking in as many lease specifics as possible to ensure shop stability, including, but not limited to:
A long lease: In his current location Johnson secured a 20-year lease. “Keep the lease in your favor for as long as you can. I may not be able to buy the space, but I know I’ll be there as long as I want to be.”
An exit strategy: Johnson may have a long lease, but he ultimately hopes to buy a place of his own and was careful to include clear language and procedures for ending the lease early. “It might seem like I’m tied down, but with the proper notice I can exit when I need to.”
A sublease option: Johnson recommends negotiating the ability to sublease, not only for shop owners who hope to eventually buy, but for added protection should the business fail. “Owners have the chance to sell their space if things go south, but the option to sublease rather than pay out the remainder is a huge asset for renters.”
A no disturbance clause: This detail can ensure renters are protected should the property change ownership mid-lease. “It’s a move that can keep you from being at the mercy of whoever might take over next, whether there’s a bankruptcy filing, the landlord sells or, unfortunately, a death,” he says.
Build a Closer Bond
While renting creates an unavoidable partnership between landlord and tenant, Johnson recommends leaning in on that connection to build a solid relationship.
“You don’t want to wait until you need something to start building a friendship,” he says.
Johnson makes a point of connecting with his landlord while on-site for property maintenance and takes him up on lunch invites to keep the lines of communication open and casual.
Consult the Experts
Johnson recommends consulting with a seasoned advisor before signing on the dotted line.
While working through the process of several attempted acquisitions, Johnson found an advisor well-versed in leasing who could offer tips, proofread his lease and draw attention to clauses that may cause issues down the road.
Think Two Steps Ahead
For Ryan Clo, a determination to own a space of his own led him through twists and turns, but as the now-owner of two Cincinnati, Ohio repair shops, he’s gleaned a few key lessons from his journey. First and foremost? Buy for your future, not your present.
Years ago, Clo’s shop was maxed out for space and operating at capacity. He ultimately moved forward with an expansion—which he ultimately maxed out the day it opened.
“When I did that expansion I wasn’t thinking about the next move. I took one step forward and was immediately at a barrier again,” he says. “If you’ve got a two bay shop, don’t buy a three bay shop. You need to give yourself room to grow.”
Run the Numbers
While considering the options available in his market, Clo realized he’d been evaluating what he could afford based off of a feeling.
“I saw this place come on the market and my feeling was that I couldn’t make it work but I finally sat down and ran the numbers and surprised myself with how doable it could be,” he says. “That was the moment it hit home. You’ve got to take your emotions out of the process.”
Stay in Your Zone
While it can be difficult in most markets to find property that’s already approved for auto repair, Clo advises playing it safe.
“If it’s not zoned for repair, just forget about it. People don’t want repair in their backyard and you’ll find out just how much after you’ve already taken the risk,” he says, recalling his own shop hunting experience.
He’d found a spot in a desirable part of town with plenty of land to expand on. Cars had been fixed in the space, but it was technically approved for marine use—the previous repair business hadn’t been approved for auto repair, but no one had complained or filed a grievance.
It wasn’t until he connected with the local building department that he learned he could buy the building, potentially receive a loan from the bank, and begin operations if no one ever complained. “But if one person took issue at any point, I’d be facing a cease and desist and completely up a creek. It’s just not worth it.”
Get your finances in order. Now.
An ideal opportunity could arise when shop owners least expect it, so Clo recommends early saving for a potential down payment—something most who are shopping the market understand is part of the process, but often aren’t ready to pay when the time comes—and working towards at least three years of clean tax returns.
“You need to be able to show you’re making money and aren’t a risk. If you haven’t been saving and your taxes are a mess, those are the first steps you need to get in order years in advance.”