I call the dojo The Mistress but the better word for it might be “Child Who Never Left The Nest.” It’s not that I dislike it, but it often sucks up financial resources that I would have preferred to keep at home. A few times it’s been “do we keep the lights on in the dojo or fix all the cracked tiles in my bathroom?” and while the obvious answer would be that we have to keep the business running, it’s not hard to see that after years and years of making the dojo a priority, how resentment can end up building to epic proportions. The question a lot of people have is whether or not a dojo is worth opening and running, from a financial and practical standpoint and the answer I have is--it depends but it absolutely can be.
Most often, we see dojo owners having a regular job outside of running the dojo itself in order to cover their own living costs and sometimes lend to the dojo when issues come up, especially when the dojo either operates at a loss, or doesn’t have a high enough membership to cover the rent and utilities. Sometimes it does break even but students are late with fees and the landlord doesn’t care, and really, in those circumstances, we’re all usually one large repair that makes us choose between our household and the dojo from closing down.
This is the part where I stand up and tell you that if you intend to open/run your own dojo, there is absolutely no reason why you shouldn’t purchase your own property for it from the outset. Zero, zip, zilch because I can almost guarantee the mortgage you get will be equal (maybe even less) to the monthly rent in whatever area you choose (it’s simply the percentage landlords like to charge--10% yearly of the value of the property, called the cap, is considered excellent rental income.) There are some restrictions that I’ll get to in a moment.
Alright, but it seems sort of silly to be responsible for a building if you’re only going to use it for a dojo, right? ...Not if you plan on renting it out as well. This is why my personal preference has been to look into mixed used or multi-unit buildings--you have the choice of living in it which lowers your own costs or renting it out to provide a stream of passive income.
As for the caveats… the down payment requirement is usually larger (20% - 50%) BUT utilizing the SBA (Small Business Administration) loans where you’re owner occupied (as in, your business occupies 51% of the building) can help you finance up to 90%.
The mortgage structure of a commercial loan is a little different than residential mortgages though--in that the amortization schedule can be up to 30 years, bringing down your monthly payments, BUT it doesn’t fully amortize and you’ll be required to pay the full balance of the principal, called a balloon payment, after 5 - 15 years. If you have the money then, great, if not, you’ll have to refinance which starts this all over. Given that the amortization schedule is interest first, you’ll be still left with a large chunk of principle. It’s great for the bank and probably your taxes (since the interest is deductible), but not so great when you’re trying to save money and wanting to be free and clear sooner. There is also pre-payment penalties to be aware of--most banks have a 5-4-3-2-1 prepayment clause, in that for the first five years, you’ll be hit with a 5% (and decreasing by 1% each year) of the amount of principle you’ll be prepaying. If you don’t have a primary residence where you hold a lot of equity on (in which case you could do a Home Equity Line of Credit or Home Equity Loan) , the commercial mortgage is the only way to go.
However, you do have the option of asking the seller if they’re willing to hold the note in which you escape having to pay mortgage insurance, but be prepared to hand over a much larger down payment (although I did recently run into a seller who desperately wanted to hold the note, but refused my high down payment because he wanted to earn buttloads in interest over the next 30 years--but on my end, where I planned to do a 1031 like kind exchange, it wouldn’t have worked so I had to let that building go.) Holding a note with the seller is what I did with the dojo building, which is paid off this year. Of course, the building was an absolute shit-hole (did I warn people I tend to curse a lot?) when we first got in, and we did 90% of the work ourselves, but that will be a post for another day. Let’s just say I never thought I’d ever, in my entirely sheltered life, learn how to tape, spackle, tile, grout, and lay wood floors, but I turned out to be a fast learner. The monthly mortgage payment was a little more than half the rent we were paying at the old place for double the space--and we were gaining equity rather than throwing it all away.
There are other costs associated with owning rather than renting, such as repairs, property taxes, property insurance, and utilities if you don’t already pay for it. The responsibility of making sure your building is zoned for a dojo (which can fall under a private club or a gym) falls onto you. On the plus side, you gain a lot of control as to what you can or cannot do, and once the mortgage has been paid off, all of that becomes purely profit.
Mistakes we made: Don’t be afraid to haggle the price. Make sure you research the average cost of similar buildings in similar condition. I had asked Adam to offer 25k less than what he did, but he felt it was low-balling it and ended up with his own number. The seller jumped up at the chance, and we were locked into that contract. It wasn’t the end of the world, since our finances supported it and it was a steal none-the-less (two years later, a random offer came in for double what we paid for it), but we’d have been done a year and a half earlier if we had a number we could negotiate instead.
Most often, we see dojo owners having a regular job outside of running the dojo itself in order to cover their own living costs and sometimes lend to the dojo when issues come up, especially when the dojo either operates at a loss, or doesn’t have a high enough membership to cover the rent and utilities. Sometimes it does break even but students are late with fees and the landlord doesn’t care, and really, in those circumstances, we’re all usually one large repair that makes us choose between our household and the dojo from closing down.
This is the part where I stand up and tell you that if you intend to open/run your own dojo, there is absolutely no reason why you shouldn’t purchase your own property for it from the outset. Zero, zip, zilch because I can almost guarantee the mortgage you get will be equal (maybe even less) to the monthly rent in whatever area you choose (it’s simply the percentage landlords like to charge--10% yearly of the value of the property, called the cap, is considered excellent rental income.) There are some restrictions that I’ll get to in a moment.
Alright, but it seems sort of silly to be responsible for a building if you’re only going to use it for a dojo, right? ...Not if you plan on renting it out as well. This is why my personal preference has been to look into mixed used or multi-unit buildings--you have the choice of living in it which lowers your own costs or renting it out to provide a stream of passive income.
As for the caveats… the down payment requirement is usually larger (20% - 50%) BUT utilizing the SBA (Small Business Administration) loans where you’re owner occupied (as in, your business occupies 51% of the building) can help you finance up to 90%.
The mortgage structure of a commercial loan is a little different than residential mortgages though--in that the amortization schedule can be up to 30 years, bringing down your monthly payments, BUT it doesn’t fully amortize and you’ll be required to pay the full balance of the principal, called a balloon payment, after 5 - 15 years. If you have the money then, great, if not, you’ll have to refinance which starts this all over. Given that the amortization schedule is interest first, you’ll be still left with a large chunk of principle. It’s great for the bank and probably your taxes (since the interest is deductible), but not so great when you’re trying to save money and wanting to be free and clear sooner. There is also pre-payment penalties to be aware of--most banks have a 5-4-3-2-1 prepayment clause, in that for the first five years, you’ll be hit with a 5% (and decreasing by 1% each year) of the amount of principle you’ll be prepaying. If you don’t have a primary residence where you hold a lot of equity on (in which case you could do a Home Equity Line of Credit or Home Equity Loan) , the commercial mortgage is the only way to go.
However, you do have the option of asking the seller if they’re willing to hold the note in which you escape having to pay mortgage insurance, but be prepared to hand over a much larger down payment (although I did recently run into a seller who desperately wanted to hold the note, but refused my high down payment because he wanted to earn buttloads in interest over the next 30 years--but on my end, where I planned to do a 1031 like kind exchange, it wouldn’t have worked so I had to let that building go.) Holding a note with the seller is what I did with the dojo building, which is paid off this year. Of course, the building was an absolute shit-hole (did I warn people I tend to curse a lot?) when we first got in, and we did 90% of the work ourselves, but that will be a post for another day. Let’s just say I never thought I’d ever, in my entirely sheltered life, learn how to tape, spackle, tile, grout, and lay wood floors, but I turned out to be a fast learner. The monthly mortgage payment was a little more than half the rent we were paying at the old place for double the space--and we were gaining equity rather than throwing it all away.
There are other costs associated with owning rather than renting, such as repairs, property taxes, property insurance, and utilities if you don’t already pay for it. The responsibility of making sure your building is zoned for a dojo (which can fall under a private club or a gym) falls onto you. On the plus side, you gain a lot of control as to what you can or cannot do, and once the mortgage has been paid off, all of that becomes purely profit.
Mistakes we made: Don’t be afraid to haggle the price. Make sure you research the average cost of similar buildings in similar condition. I had asked Adam to offer 25k less than what he did, but he felt it was low-balling it and ended up with his own number. The seller jumped up at the chance, and we were locked into that contract. It wasn’t the end of the world, since our finances supported it and it was a steal none-the-less (two years later, a random offer came in for double what we paid for it), but we’d have been done a year and a half earlier if we had a number we could negotiate instead.
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