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Last Update: Sunday April 11, 2021

Key Idea: Buy a Building

After 15 years of paying rent to landlords, Bill and Joan Keller figured they should buy their own building.  Le Travel Store is an important part of the Historic Business District in downtown San Diego.

Key Question:

A: 

One way is to invest in commercial real estate.

Q: What type of building did they buy and why?

A: They bought an old two-story building in an historic business district because they believed the neighborhood would be revived with help from city planners, the city council and other merchants. In other episodes, we learned that Carol and Dean Schroeder bought the building that houses their retail store when they first opened; Marc Katz of Katz Deli in Austin, Texas, tells of buying the building first, then opening his restaurant.

Q: What has Bill done to insure their success?

A:
He has played an active volunteer role in the development of the business district in which they operate.

Q: When do we rent and when do we buy a location from which to operate our business?

A: 
We all remember when we bought our first home and were elated to send that first payment to the mortgage company. No more pouring cash into the rent dry hole, we were building up equity! At the end of the month, the benefit of the rental check is gone but when we make a loan payment we are buying an appreciable asset and getting a nice place to live, too!

Should we approach the rent vs. buy issue the same in our businesses? Should we buy a building as soon as we can? Absolutely not, the situations are completely different.

For most of us, the home purchase is the most significant purchase we will ever make. We buy the house we can afford based on our take-home pay after taxes less other obligations, like car payments, living expenses, and savings requirements, like college educations for our children and retirement funds for ourselves. Although personal financial planning may have its challenges, it is simplistic when compared to providing our business with the capital it needs to grow and prosper. Forecasting working capital requirements, managing cash flow, is one of the most important aspects of operating a successful small business.

Buildings are what accountants call long-term assets. They are not liquid, cannot readily be converted to cash. And we all know businesses need cash! Cash is required to pay employees, purchase inventory, pay monthly operating expenses, and fund our infrastructure costs, like marketing and research and development. Cash reserves preserve our businesses when we lose a major customer or suffer reduced sales or increased costs because of economic conditions beyond our control.

Every business can service a limited amount of debt. Bankers like to talk about the debt-to-equity ratio, total liabilities divided by the total of common stock, paid-in-capital, and retained earnings. Bankers like a 1:1 ratio but are generally comfortable up to a 3:1 ratio. Anything higher than that and bankers get nervous, concerned that the capacity of the company to service the debt is not adequate.

As long as your company is growing, it is generally not a good idea to buy a building. Increased sales usually mean increased accounts receivable and, in non-service businesses, increased inventory levels. You pay your employees and your operating expenses monthly, your customers pay you in 45-60 days, and the growth has to be financed. Lines of credit can be obtained from banks to manage the cash flow of growth.

Should a small business always lease its operating facilities, and never buy its land and building? No, of course not! The advantages of owning property to a business are the same as the advantages to an individual. All we are saying is that while your business grows, its financing needs grow as well. The borrowing ability of any business is limited; make sure you have adequate borrowing ability to fund the growth of your business before taking out a mortgage. The property may appreciate, but unlikely to the extent of the profits of additional sales that are adequately financed.

If your company is mature, with relatively consistent sales and profits each year, consider investing in real property. If your company is still growing, try to anticipate both your financing needs and borrowing capacity. Having access to adequate working capital may contribute more to your overall profitability than real property appreciation would.

Think about it

Do you own your existing location? Could you? What experts could you consult to investigate the possibilities?

Clip from: Le Travel Store in the Gaslamp Quarter

San Diego:  Joan and Bill Keller, founders of Le Travel Store,  have traveled so much,  you ask, "Where haven't you been?"  One answer was "The Antarctica." But, they got close -- Ushuaia, capital of Tierra del Fuego - Patagonia down on the tip of Argentina, the most southern city on earth and on a clear day ... of course, Joan and Bill Keller have the Antarctica on their list, but compared to most people, their list is rather short.

Become an independent traveler, but do it with panache. Take some of your customers, your investors, CPA and banker, and of course, your family with you. Source the world. 

Also, this team is well-grounded in their community. They lead the "return to authenticity" movement that champions Main Street. The National Trust for Historic Preservation led us to them and this historic Gaslamp Quarter!

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Le Travel Store (BK)

Bill Keller, Founder

745 Fourth Avenue
San Diego, CA 92101
6195440005

Visit our web site: http://www.letravelstore.com

Office: 6195440005

Business Classification:
Travel

Year Founded: 1975

Buy a Building

BILL: Coming out of Horton Plaza, that was sort of a 1980s environment. It was very expensive and kind of a theatrical environment. The kind of retail that had been growing in the early 1990s was sort of the warehouse type of store, the big box retailer, and I knew that we needed to communicate that we were--we had more stuff at lower prices. So we wanted a warehouse effect, but I also wanted a really nice warehouse.

HATTIE: The design. Why is design important to you?

BILL: I have the sense that a lot of people are seeing us for the first time in this location. We have a lot of tourists coming through this area.

People come through the front door, and they form an impression fairly quickly of the business. And they make a decision about whether it's gonna be a fun place to visit, and should they continue, or should they just turn around and go back.

HATTIE: It's the old first impression thing?

BILL: Oh, man, that first impression is so important. And if people walk in and there is a sense of design, something interesting in the way the store is created and laid out, you're gonna get a lot more people walking through. What people love about it is that connection to the past. This, you know, being a turn-of-the-century neighborhood, a 1907 building, I mean, this is really something quite different from a mall location or a strip mall.

JOAN: What we've done here is increased our potential for revenue and for income. There is a little bit of backsliding. I mean, we took money that we had earned over the years and invested it in this building, because we feel this building has much greater potential than our old location. We also feel that this kind of location, a downtown, on the street, historic neighborhood location, is the wave of the future. I think people are a little bit tired of malls, a little bit tired of seeing the same huge chain stores in San Diego that they see in Salt Lake that they see in Denver.

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