At some point throughout the process of operating a business, you will come to the decision, ” Do I lease space for my business or buy a commercial property?”
Just like with most decisions, it is important to weigh the PROS and CONS of each option. First lets talk about buying a commercial property for your business.
Whether its offices, industrial space, retail or restaurant space, you have decided that you want to own a commercial property to run your business out of!
What does that mean for your business moving forward, what are some benefits and risks you should be aware of?
Buying a Commercial Property
The benefits of purchasing commercial real estate for your business
- Build Equity– Simply put, Equity is the difference between the market value of your property and the debt you have on it. As you pay down the debt (principal) on the commercial property, you are building equity. Equity is a financial asset and a smart way to build wealth.
- Potential For Additional Income– If you buy a commercial building that has multiple units, you have potential for additional income. This can be a game changer! Use the income from rentable space to cover mortgage or business expenses! Finding a building that is cash flowing and would work for your business is definitely something to consider.
- Creative Control– You will never have to ask permission to paint walls a certain color! Make changes to the building and space (within city and zoning approval) to make the space your own.
- Tax Incentives– Interest payed on your mortgage is a tax write off. Tax breaks also for depreciation and non mortgage expenses!
Things to be aware of...
If you are going to get a mortgage on the commercial building, typically banks require anywhere from 20-30% of the purchase price as a downpayment for a conventional loan. So, if you want to buy a commercial building, start saving!
When you become a landlord, if you decide to manage the property yourself, you will need to have connections with local handymen and women, plumbers, roofers, painters, landscapers etc. Although this is an additional responsibly, with the right connections, fixing issues at your property are just a phone call away.
It is important to budget for repairs and maintenance on the property.
Now, lets shift gears and take a look at some of the benefits of leasing commercial property and things to be aware of…
- Access to more liquidity– When leasing commercial property, a landlord will typically require a security deposit and first months rent upon signing a formal lease. Less money down means more money to reinvest into your business.
- Fixed monthly expense– This depends on what type of lease you have and what YOU are responsible for and what landlord is responsible for. However, if your rent is $1,500/mo + utilities + CAM (common area maintenance charge) of $85 and landlord is responsible for everything else. You know that you will be paying $1,585/mo + utilities. If roof leaks its not your responsibility or expense to fix.
- More Options– Typically, there are more options for leasing than buying. If you’re afraid of commitment, after the lease has expired, you can change locations or maybe even go month to month!
- Tax breaks – Expenses like lease payment, maintenance, insurance and any other property expenses can be deducted.
Things to be aware of...
Lack of equity – YOUR money is going into the pocket (so to speak) of your Landlord. You can occupy the space during this time but you are not building equity that can become an asset to you in the future.
Restrictions – Since you don’t own the property, you will more than likely have to get the Landlord’s approval before you make any changes to the space.