That question may already be on your mind—whether to buy or rent commercial space. It’s a decision you shouldn’t take lightly. If you already rent, you can negotiate the terms of your lease agreement or move your operation to a different location. Some business owners purchase property to reap the benefits of long-term ownership.
You already know that where you set up shop is as important as what product or service you provide. But how do you determine whether buying or renting is the best option?
This post will answer that important question. Additionally, we provide another option you may not have considered—running your business from home or remotely.
Keep in mind that leasing and renting are not the same. Leasing usually involves a 6, 12, or 24-month contract whereas a business can rent a space for a 30-day period and renew the agreement each month.
In this article, what we discuss about renting can apply to leasing too.
Is it better to rent or buy commercial property?
Most answers to questions are straightforward but deciding to rent or buy property is trickier. Business owners must wade through determining factors such as the ones listed below.
There are a couple of things you need to consider before making a decision:
Do you have the capital for the acquisition?
Of course, the main thing you should take into consideration is costs.
When you rent a property, your cash flow doesn’t take a huge hit, and you gain immediate access to the asset. What do you pay upfront? You may be required to put down a security deposit, pay the first month’s rent, and owe attorney fees (if you hired one).
If you want to purchase, you must have enough capital to cover the payment (or if you get a mortgage, the down payment, monthly payments, and closing costs). The asset will also be subject to real estate taxes and maintenance costs/improvements.
If you own the property, you don’t need to worry about a landlord increasing the rent to an amount you can’t afford and subsequently lose substantial revenue. Of course, if you bought the property with the help of a mortgage, you do need to worry about making monthly payments.
If buying a property isn’t an option, you could negotiate terms in the rental agreement to limit the amount of rent the landlord can charge over a two to five-year period, for example. If you pay your bills on time, most landlords will agree to this arrangement.
If you’re a seasonal business, it’s possible to negotiate a flexible rental rate to accommodate changes in cash flow.
Buying not only involves a big upfront investment, but it also involves many other costs. But when you rent, the landlord is responsible for all those extra costs, like maintenance, taxes, and insurance.
Maybe you’re not sure what’s the best location for your business, or your industry requires you to constantly move around.
Renters have the benefit of moving to another space once they fulfill their rental terms.
Your plans for the commercial property
Believe it or not, this one is very important. If you rent a property, you might not be able to make certain changes to the infrastructure: your landlord has the final word on those.
On the other hand, buying a commercial property gives you more freedom to renovate the property and reorganize the commercial space to your liking.
Can you get a mortgage?
If you want to buy, but you don’t have the capital upfront, a mortgage is a great alternative.
Of course, you need to make sure you can access a mortgage. The most important aspect for qualifying is to have a good credit score. Banks will most usually require you to have a score of 660 or above.
You also need to consider that, with a mortgage, you will be required to put a down payment of, usually, 20%.
Location, location, location
It doesn’t matter if you buy or rent; your top concern should be the location. High traffic areas are ideal locations to attract customers and increase sales. Likewise, your current location must allow for future business growth.
The location might change your mind whether you decide to rent or buy. For example, maybe you’re dead-set on buying a property, but if you find the perfect location and it’s rent-only, you might have to make a compromise and choose to rent.
Renting/Leasing a commercial space: pros and cons
- The landlord repairs the building’s roof, plumbing and heating, and assumes other financial risks as a property owner. This allows you to focus on growing your business and not get bogged down with property ownership.
- Business owners can deduct expenses such as rental payments, utilities, moving expenses, and other expenses incurred from running the business. If you make changes to the rental space, you should be able to depreciate the improvement expenses within the lease’s timeframe.
- Flexibility to change your location is one of the best advantages of renting space. As your business grows, you can move to a better location or larger space. Just keep in mind, the perfect rental space may be hard to find.
- Paying rent does not build equity since the landlord owns the property. In some instances, rental payments can be larger than mortgage payments.
- Some landlords fail to keep up the property by neglecting routine maintenance, failing to make improvements, or not providing adequate security features.
- You may have a great location, but the landlord may decide to use the property for other purposes. There’s no iron-clad guarantee that the landlord will renew your rental agreement.
- If you make changes to the building’s interior, the landlord may require that the commercial space be returned to its original condition when the contract ends.
Buying a commercial space: pros and cons
- When paying a mortgage, you build equity every time you make payments. You also can increase your credit score rating. That puts your business in a more favorable position with lenders to receive additional funding. Likewise, the asset can be used as collateral for a secured loan.
- You aren’t required to move machinery, equipment, and fixtures if you decide to sell the building and its contents.
- The building may appreciate in value, which increases your return on investment.
- Property owners qualify for tax deductions to reduce taxable income.
- Extra space with its own entrance can be rented and provide an additional revenue stream.
- Real estate values could decrease, or taxes increase depending on where your property is located. It may be harder to sell your business in the future, and that decreased property value could incur a capital loss at the time of sale.
- Typing up capital puts a business at greater risk when revenue decreases.
- If your mortgage terms include an adjustable interest rate, a business owner pays less principal and more interest, which decreases the investment value.
- There may not be enough cash flow to cover major repairs such as replacing a roof or paying for an addition.
- Business owners need to carry liability insurance as protection from a lawsuit if someone is injured on the property.
A third option: a virtual setting
Surprisingly, renting and buying are not your only options.
If 2020 and the pandemic have taught us something, is that remote working is possible for many businesses. From office employees working from home to shops opening an eCommerce, the internet is a great alternative if you can’t or don’t want to have a physical location.
You could run your business on the go by setting up a virtual office. A virtual business allows you to manage your employees, invoicing, and other tasks from anywhere you happen to be. Plus, you aren’t required to rent space or buy a property.
As long as you have a device connected to the internet, you can set up an eCommerce site or office using cloud-based applications to run a bookkeeping service or become a marketing manager.
Now you can decide whether to rent or buy commercial space
As you can see, there’s a lot to consider when deciding whether to rent or buy a property. By knowing the pros and cons of each, you can make the best decision for your business.
It’s articles like this one that enforces our motto, “No Business Left Behind.” We want your business to succeed and provide our readers and members a library of articles on a range of subjects. Moreover, by subscribing to the Camino Financial Newsletter, you can receive more business management tips on ways to strengthen your business.
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