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Chapter 4. Service Delivery System and R... > Advantages of Real Estate Ownership

Advantages of Real Estate Ownership

Ownership of real estate does have some advantages. Although it can slow development, it can also hedge risk. By and large, the rationale for owning real estate is to accumulate equity in the real estate while the business is able to service the mortgage. You build equity in real estate in two ways: The first is by paying down the mortgage and thereby reducing the debt on the property. The second is when a property appreciates in value as a result of market forces. Investing in the property with equity is often a necessary component of obtaining a mortgage. Paying a long-term mortgage will clearly restrict the business’s ability to grow with any speed, but it also creates a downside floor for you should the business fail. In this case you would fold the business and be able to sell the real estate at (hopefully) an appreciated rate. Although the income stream of the business failed to bear ample fruit, the security of the real estate provided some financial safety net. On the other hand, if leasing is the preferred choice of real estate financing, then the business may in fact be able to grow more quickly because less of the capital is tied up in the real estate. But in this case, should the business fail, no equity will have been accumulated in the real estate, and no “salvage” value can be obtained as a last resort.


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