Buy or Lease Commercial Space -
What’s the Right Move for Your Business?
Whether you’re just starting out or have been in business for a few years, there comes a time when you need to decide if you want to lease or buy a commercial space. There are benefits and drawbacks to both. Take a closer look at all the pros and cons so you can make the most informed decision possible and the right move for your future.
Before you do anything, choose a location that meets your needs.
What are you looking for? Whether it’s office space, a retail location, a warehouse or an entire building, location can make all the difference in the success of your business. Ideally, you’d like to be situated in an area that’s growing, popular and offers steady traffic, especially if you’re a retailer or restaurant. You also want a space where you, your employees, customers and clients feel comfortable coming to, and which offers safe, accessible, and well-lit parking. You want to make it easy for customers to find you and employees to get to work, so do the legwork to find the location that makes the best sense for your type of business.
BUY: GAIN OWNERSHIP AND EQUITY
The benefits of purchasing your own space:
- You own it. No landlord, no paying rent each month that doesn’t contribute to the bottom line. You can do whatever you want to the space to make it reflect your business. And you can lock in your commercial monthly mortgage payment for years to come with a fixed amount that you can budget around. Since real estate is a long-term investment in your future and your business, you can also tap the equity as collateral to help finance other needs or pay down debt. In the best scenario, your commercial space will appreciate in value, so you can sell it down the road and realize a nice profit to use for your next venture.
- You can rent it. If you have extra space to spare, you can lease to one or more tenants and enjoy the extra income. While this will help offset your own costs, you’ll also be taking on everything that comes with being a landlord. You’re on-call for any issues that arise, collecting rent, and maintaining the rental space.
- You get tax breaks. The costs you incur as an owner and in operating the space can provide tax deductions including mortgage interest, property taxes and more.
Why you might want to think twice:
- You’ll need cash. From closing costs, to your initial down-payment and monthly mortgage payments, you’ll need a lot of upfront money. If you’re just starting out, that might be more than you’re willing to commit to in the beginning. Once your business is on its way or more established, then you might be more comfortable undertaking this initial investment.
- You’ll have ongoing expenses. After you buy, there’s more you’re responsible for: yearly property taxes and insurance premiums, repairs and maintenance, basic overhead like utilities, technology, and supplies, plus costs for parking and security if applicable. Don’t forget to budget for unplanned expenses. And remember - everything you pay out will cut into your profits, too.
- You can’t up and leave. Ownership means it’s yours until you sell the space. And fluctuating real estate markets, changing business needs, and increases in local taxes can all combine to make it difficult to sell when you’re ready. You could always sub-lease, but that presents a whole other set of responsibilities.
LEASE: ENJOY FREEDOM AND FLEXIBILITY
Why this might work for you:
- You stay liquid. Rather than making a big purchase upfront, you just pay month to month. This leaves more cash in your account to do other things related to your growing business. Usually your landlord will cover any costs related to repairs and maintenance, giving you less to worry about - but get everything in writing to be sure.
- An easy way in. If you want to try out a particular building, a certain location in town or an up and coming neighborhood to see how your business might fare there, then leasing gives you the option to explore and test-drive it. A shorter lease might make more sense if you want to assess how your business is going to do. As well, with a longer lease, you might be able to negotiate a lease amount that better aligns with your financial picture.
- An easy way out. When your lease is up you can simply choose to renew or move on to a more suitable space. You’re not tied to a mortgage or locked into a neighborhood. This allows you to be more nimble and responsive to changing real estate markets and the growing needs of your business.
- Tax benefits add up. As a small business with a lease, you can deduct your monthly payment and business-related costs like utilities, supplies, technology, and more.
Watch outs to keep in mind:
- No equity. Your rent money is going to your landlord, not adding to your savings or investments. When you run the numbers, sometimes your rent could be higher than an average mortgage for the area. Leasing could be more affordable than you think and that’s why it's beneficial to get the advice of a professional as you compare costs.
- Less control. The landlord calls the shots. While many are great, some can be slack about responsibilities. Depending on the terms of your lease, your rent can change year to year due to many factors. If you're having a good year, that might not be a problem. But if business is fluctuating, making ends meet and budgeting becomes more challenging.
- Do the math. Some commercial leases can be for five or 10-years. Especially when there’s competition for space in a good real estate market. You have to honestly ask yourself if you’re prepared for that kind of financial commitment and if you’re sure you’ll be in business that long.
Undecided? Start a Home-based Business.
You can always turn that extra bedroom, basement, or garage into a home office. This is a less complicated way to launch a business and allows you to assess its viability before you go out and lease or buy a space. Plus, many of the expenses related to the portion of the home you use for business may be tax-deductible. Another great option to consider is a shared or co-working space. Whether it’s just you or a few employees, this can be a less expensive option out of the gate. In most cases, you can rent a desk or an office and sign up for conference rooms when you need to brainstorm or meet with clients.
No matter what, get advice.
Whether you intend to lease or buy, do your research and keep an open mind - you might think a conventional office is right for you and then happen upon an open and airy loft space that matches your entrepreneurial spirit. As you look around - and before you make a decision - talk to the professionals. Be sure to work with an experienced commercial real estate realtor. And depending on what you need, consult a lawyer, mortgage specialist, your accountant, and your family - after all, your business success directly affects them, too.
Meg Schutte is a Bank of Hope Blog contributor.
The views and opinions expressed in this article do not necessarily represent the views and opinions of Bank of Hope.