Are you faced with the challenge of deciding whether to buy or rent commercial space for your business? It’s not a dilemma to take lightly. It’s a decision that needs careful thought, assessing the major pros and cons of each option. Your understanding of what it means to buy or lease commercial space will help you to make the best decision. Whatever you decide, you will have to live with the consequences. Here’s a look at some of the points of consideration when trying to decide between renting or purchasing commercial space.
Buying commercial space entails purchasing the property from a seller using cash or financing the purchase using loan proceeds. Only after you have paid off the loan can you own the property free and clear.
When you purchase a property using a loan, the down payment and monthly payments you make helps you to build equity in the property. When it comes to future financing needs, such as refinancing or selling the property, your equity in the property can be used as collateral.
Commercial property is an asset that tends to appreciate or grow in value over time. Inflation and interest rates are two key factors that can impact the rate of appreciation, but if you choose to sell the property later, you could gain capital that you could put towards other ventures.
Your interest and depreciation on your commercial property are both considered tax-deductible. This helps you to save money that offsets property expenses.
If your property is not at full occupancy, you could rent the leftover space to tenants and generate a passive income stream. This may be ideal if you own a space with more than one floor, where you occupy the top floor, and the ground floor is available for rent.
A large down-payment is typical when purchasing commercial space, and this could be between 15% and 35% of the cost of the property. Additionally, closing costs and appraisal fees are also added expenses, all of which add up, taking a big bite out of your capital.
Purchasing your commercial space doesn’t mean that you have no more related expenses. Properties require upkeep and upkeep costs money. Things such as insurance, property taxes, as well as repairs, and maintenance have to be paid for whether you like it or not.
Purchasing your home with the proceeds of a loan means having a mortgage payment that ties you to one place. You can’t simply get up and leave if you are no longer happy with the space. You have to sell, and there is no guarantee that you will get the asking price you wanted, which would be a loss for you.
Renting commercial property involves leasing the space from its owner and you becoming a tenant. Commercial rentals are usually offered on a long-term or short-term basis, but you may be presented with the opportunity for a lease-to-own plan, which could give you the chance to eventually own the property.
With no-down-payment, you can expect to have more freedom with your cash and not have it badly tied up. However, some upfront fees for an attorney, broker, prelease inspection, and security deposit should be expected but shouldn’t be excessive.
Particular costs may be tax-deductible, including maintenance and utilities, property insurance, lease payments in their entirety, along with property taxes(type of lease may be a factor).
Compared to qualifying for a commercial real estate loan, qualifying for a lease is an easier process. You have more leeway to pick the space that you want and move your business to a new location when the lease ends.
Depending on location, your monthly rent could exceed the average monthly mortgage payment of the same property. Added to the lease payment could be monthly retail insurance, property taxes, utilities, and maintenance costs, typically associated with a triple-net lease agreement. Furthermore, you may experience a rent hike year to year, which could impact long-term budgeting.
Equity is not something that you accumulate when you rent a commercial space. However, some contracts may have a lease-to-own commercial property clause that permits the tenant to apply a portion of the rent already paid toward purchasing the property. Capital appreciation cannot be without equity in the commercial property.
Should you buy or rent your commercial office space? That decision is yours and may be dependent on preference, need, or capital. Consider the benefits that each option provides and how they lineup with your business goals. Whatever you choose, you are making a big commitment and investment. Quinn & Assocaites is here to partner with your business and offer your guidance.