Just like in your personal life, when first starting out on your own, you were probably faced with the dilemma of renting versus buying. Renting an apartment gave you the freedom to move at will if the area or space didn’t serve your needs. It also came with less responsibilities when things broke down. It could have potentially come with a lower monthly payment as well. Buying a home, on the other hand, meant you were investing in something long term. It felt like it was yours and came with the potential promise of a return on your investment. It also brought motivation to make it the best space ever, because it was yours. All of those feelings apply to your business space.
Should you continue to lease a space or purchase a brick-and-mortar location that you own and will build equity? Let’s break down the pros and cons.
Remember though...regardless of how long each list is for the pros and the cons, you have to make your decision based on the benefits of your business and the market conditions.
Pros of Buying.
- Fixed Costs - Commercial real estate can be expensive, often valued in the millions of dollars. And if it’s in an up-and-coming area, that value could go up exponentially. Securing a promising location and locking in your commercial mortgage long-term can give your business clear, fixed costs. You will enjoy no rent increases and will not have to worry about the possibility of being bumped out of your location when your lease is up by a larger business.
- Appreciation Value - If your property is in a good market, it will appreciate in value, giving you the opportunity to sell it for a nice profit. You can retire earlier than expected or use that cash to continue to grow your business elsewhere.
- Tax Deductions - Like owning your home, you reap the benefits of many tax deductions. When you own your commercial building, some of the taxable benefits include property improvements, maintenance, insurance, mortgage interest and annual depreciation.
- Additional Income - If your space is large enough, you can rent out the extra office space adding another source of income that can go to improving your business. You could also develop a partnership with the other entity renting your space, benefitting from their customers as well.
- Freedom to Renovate - If you own the property,it’s yours to design to your liking and more specifically to your business’s needs. Renting a space will provide restrictions and approval from your landlord to modify the space.
Cons of Buying.
- Upfront Costs - Like buying a home, there are closing costs associated with buying a commercial building. The closing fees will vary depending on the building and the size of the loan. There could also be property improvement costs.
- Operating Costs - You will more than likely see a substantial increase in operating costs. You will now be responsible for all property and building maintenance and repairs. However, by making this move, and growing your business, at this point, you should also see a substantial increase in your sales to offset these expenses.
- Lack of Mobility - Once you have made your purchase, you are no longer as mobile as you would be if you were leasing. You would be bound to the area in which you made the purchase. This is why it is important to make sure your business entity will be able to thrive in the area you choose to purchase.
Stop by next week to read part 2 and learn more about the pros and cons of leasing space for your small business. If you just can't wait, follow this link to our e-book: "Taking Your Business to the Next Level".