When Does Buying Your Business Location Make More Sense Than Leasing It?
Assuming you can afford it, there’s really only one reason to buy your business location instead of leasing it: because it benefits your bottom line. The more complicated question is how you decide whether or not it’s a good business move. To help you decide we’ve listed some of the most crucial considerations below.
GOOD REASONS TO BUY
Appreciating Land Values
If you plan on locating in an area where you know the properties are undervalued, it would benefit you to buy instead of lease. You will have the advantage of being able to sell whenever you want and make a good profit on the transaction. If a commercial developer is considering a large project in the area where you want to locate, buying before information about the project becomes public may be a real boost to your bottom line.
There are tax advantages to buying. You can’t deduct the money you spent buying your property (unlike rent), but you can take annual depreciation deductions. You can also deduct the interest on the loan you took out to buy the property.
It can be hard to find appropriate space to rent if your business requires specialized equipment. When you purchase a property, you can do whatever you want with it as long as you comply with zoning regulations and local laws. You can alter a building, add on to it, and knock out walls as you see fit. You don’t have a landlord whose permission is required before you do anything. You also don’t have to put up with a pesky landlord coming around all the time questioning your every move.
If the landlord decides not to renew your lease, and you have specialized equipment and fixtures or modified the building in some way, it can cost you a bundle to relocate. This is especially true if there is a clause in your lease that requires you to return the premises to its original condition when you leave.
When you own your business location and have some equity built up, you will be able to use it as collateral to finance an expansion or restructure your debt.
Additional Revenue Source
When you own a property you have the opportunity to sublet space you’re not using. This can be a lucrative venture when you are located in a popular area with little or no other rental space available. You have to take into consideration that you will become a landlord though and have all the obligations that go with the title.
GOOD REASONS NOT TO BUY
Restricts Cash Flow
Starting a business is expensive, and money can be tight in the beginning. The down payment you need to purchase a property may be outside your reach. Purchasing real estate will probably require you to incur other upfront expenses like broker and attorney fees. If you lease, you’ll need a security deposit and the first and last month’s rent, which is usually considerably less than the cost of purchasing.
When you own property, you are responsible for maintaining it and making any necessary repairs. Leasing frees you of this obligation. The landlord is responsible for making sure the property is maintained. This includes not only making sure the building remains structurally sound (i.e. heating, cooling, plumbing, electrical, and roof), but also maintaining the appearance of the real estate (shoveling snow, cleaning windows).
You can project the growth of your business when you first start out, but no one knows exactly what the future holds. You might outgrow your initial location and have to relocate to something that better fits your needs. You might have miscalculated community trends and find yourself in an area of town that’s no longer hot. When you lease, it can be a lot easier to pick up and move than when you own.
Lenders are most likely not going to approve a loan to someone who has recently suffered personal or business financial reverses. You may have trouble getting a loan when you first start a business because you haven’t established your ability to run it successfully. On the other hand, a landlord is much more likely to lease you space although it may require additional guarantees.
Whichever route you decide to go, you will need the help of experts to do it, including:
- An experienced commercial real estate agent
- An attorney familiar with conveying commercial property
- An accountant
- A mortgage consultant
Such an important decision should not be made until you have all the facts and have weighed all the pros and cons.