Commercial space: To buy, or to lease?
Payment size. Liability. Maintenance. Cash flow.
The decision whether to lease space for your business or buy a building or site is a big decision and should be carefully considered.
Either way, you should review liability, your budget and expected cash flow, the short- and long-term goals of your company, and how you plan on using the space. Today, we’re walking you through the pros and cons of each option so you can make the wisest choice.
Things to consider before buying property for your business:
- Your location is just as important as it would be in residential real estate. Where is your customer base? How easy is it to navigate to? How safe is the area? Is the signage visible?
- Mortgage rates are currently low, and may help you make a purchase without being stuck with a high interest rate.
- A mortgage with a fixed interest rate can give you a long-term fixed payment, rather than facing lease increases over time.
- If you would like to make specific renovations, ownership may be an attractive option.
- If you have machinery or equipment that is hard to move and you want to put them in a customized space, buying may be a better option for you.
- Your building and property may appreciate over time.
- Purchased property is an asset and can be used as collateral for financing purposes.
- You won’t have to report to a landlord or manage communication to get things taken care of.
- If the space is big enough, you can sublet some of it for additional revenue.
These are all positive outcomes, but you could be negatively affected by purchasing property, with situations such as:
- A possible decline in property value could negatively affect your business.
- A mortgage payment may tie up a larger chunk of cash flow on a monthly basis. If you’re just starting out, it may be wiser to invest that back in the company at first.
- If you have an adjustable rate mortgage, your interest rate may fluctuate, making it more difficult to manage your cash flow.
- Owning property can add cost and time for repairs and maintenance, taxes, insurance, and security.
- If you decide to sublet space, it may take some of your time to manage the property as a landlord.
- If your business is growing quickly, you may run out of space sooner than you think and then have to consider the added expense of an addition or purchasing more property.
- The upfront costs of purchasing a building can be higher than a deposit to sign a lease.
- Depending on the state of your assets and accounts, it may be harder to qualify for a commercial mortgage and receive financing
- Depending on the property itself, you might be taking on more liability if anything were to happen on the property
It’s a lot of pros and cons to consider! If you’re reading this list and thinking, well, leasing is obviously a much better choice with fewer complexities, we have a list for that, too.
Leasing can be beneficial in the following ways:
- You’ll have more liquidity as your up-front costs will be lower than for a mortgage.
- You can deduct certain payments on your taxes, including the entire lease payment, any maintenance and utility costs you pay, and any insurance payments you’re making.
- If things are shifting for your business or you would like to be in a different area in a few years, you won’t be tied to the property you own. When your lease expires you have more flexibility to do as you choose.
- You’ll have more time to spend on running your business instead of managing a property.
- A steady rent payment might be easier to budget for than an adjustable rate mortgage or rising maintenance costs.
- It is easier to qualify for a commercial lease than a mortgage.
However, there are certain drawbacks to leasing as well, including a lack of investment potential with a site’s price appreciation or building equity in the property. There’s no rental income potential, and you might have a higher monthly payment than you would with a mortgage loan. As a company that is leasing space, you also lack control of the building and the space you’re using.
Now, which might be better for you and your company?
When it makes sense to buy:
If you have enough cash to make the down payment and about six months’ worth of mortgage payments without making things tight for you, that’s reasonable. If you would like to sublet some of the space or think you will be there for at least seven years, it can be a worthwhile endeavor. You’ll be able to reorganize the space as you see fit, make it work best for you and your company, and build equity in the property over time.
When it makes sense to lease:
If you’d like the flexibility to leave a space within a year or a few years, or you think things could change and you might grow or shrink, leasing is probably a better fit. If the down payment or maintenance costs would squeeze your budget, leasing is the smarter choice.
If you decide to purchase space for your company, you’ll need to work with an experienced commercial realtor who will know all the ins and outs. A lawyer, mortgage advisor, and a knowledgeable accountant are also key.
As you work through the complexities of deciding whether to lease space or purchase commercial property, rely on wise counsel to guide you.
Our accountants are always available to answer questions or set up a meeting to chat.Schedule an Appointment Today!