Should Your Business Lease or Purchase Commercial Space?
How to Decide Whether Leasing or Buying Is Best
If your business is successful and your current lease is about to expire you may want to consider buying commercial space or industrial space rather than continuing to lease. With current interest rates at historic lows many business owners are taking advantage of low mortgage rates to own their own premises, thereby building ownership equity rather than paying a landlord. However, there are other considerations that should be taken into account when deciding whether to buy or lease.
Location, Location, Location
Location is just as important with commercial space as it is with your own home. If your customer base is primarily in a particular part of town you will likely need to continue operating close to your current location – and forced to lease the space you want as it may be difficult to find space to purchase in the same area. A different location may not appeal to your customers.
If after a number of years in a particular location it becomes necessary to move, owning your own commercial space can be a major drawback. Deteriorating business conditions, changes in the neighborhood, or local tax increases may make selling the premises very difficult.
On the other hand, if you are fortunate enough to purchase a building in an upcoming area and/or at the bottom of a real estate cycle, the property may greatly increase in value in future.
Fixed Overhead and Long-Term Stability
A great advantage of owning your own premises is knowing what your future costs will be – mortgage rates have been declining for decades and do not fluctuate like lease costs sometimes do.
By owning the property the real estate component of your business overhead is fixed for the mortgage period.
If your business uses specialized equipment, machinery, or fixtures that are difficult and/or expensive to move, ownership of the premises may also be beneficial.
On the other hand, lease costs are affected by improvements to the building, changing real estate values, demand, and other factors.
There is no guarantee that at the end of a lease period you will be able to renew your lease under similar terms. Recently, for instance, I spoke with the previous owner of a local retail business who when faced with an unaffordable 30 percent increase in lease costs decided to close his business.
Conversely the renewal of an existing lease can work in your favor in periods of slow demand and low occupancy rates. In such an environment if you have a good relationship with the landlord you may be able to negotiate better lease terms such as a lower rate, a longer lease period, or improvements to the premises.
Note also that owning a business property can be problematic if your business is in a growth (or downsize) phase where you may need to sell the existing premises to either acquire additional space or reduce your space requirements. Renegotiating a lease is much less difficult.
Do You Want to be a Property Owner/Landlord?
When you rent commercial space the costs of property taxes, maintenance and repairs, security, parking, insurance, etc. are mostly included in a lease agreement. If you purchase a property these expenses become your responsibility. Any decision to buy or rent should include a side by side comparison of the cost of renting versus owning.
As an owner you should have an annual maintenance budget that includes money set aside for major repairs such as roof replacement, building envelope refurbishing, etc.
One advantage of owning is the possibility of bringing in additional revenue by subletting any extra space that you may have on the premises. (See 5 Ways to Make Money.) This can be lucrative provided there is a steady demand for space in your location and a good supply of quality tenants. However, as anyone who has ever been a landlord can tell you, dealing with tenants can be very frustrating and time consuming, and in a slowing economy this tends to be more of a problem.
Your accountant can analyze your operating budgets, investigate tax issues and advise on the pros and cons of buying versus renting from a financial perspective, but when making the decision to buy you should also take into consideration how much extra time will be taken up by being an owner/landlord.
Dealing with maintenance issues and tenants (if subletting) can consume a great deal of time that may be better spent focusing on your own business activities.
Have You Considered a Home-Based Business?
If your business is suitable there are a great many advantages to operating a home-based business. Aside from not having to commute to work, home business owners typically have a better work life balance, and the expenses related to the portion of the home used for business are fully tax-deductible. If you're interested in starting a home business see:
Consult the Experts
In any decision to purchase commercial space make sure you have the right people on your side and involve them at all stages of the decision. This includes:
- An experienced realtor with expertise in commercial real estate
- a lawyer who specializes in the conveyancing of commercial property
- a mortgage adviser
- Your accountant