If you’re a small business owner who has outgrown your spare bedroom or garage, or if you’re looking to expand to a new location, you might want to consider whether to buy or rent your next commercial space.
Leasing Commercial Property
Let’s start with making the decision to lease a commercial space. In some cases, you might not have a choice at all. If you’re just starting your small business, you might not have the resources to buy and funding can be difficult to come by as a fledging enterprise.
But leasing isn’t necessarily a bad thing. Some of the advantages of leasing your business location include:
- Flexibility: As your business grows and you need to expand, you can change your business location quickly without worrying about whether you can sell your existing commercial space.
- Lower market risk: You don’t have to worry about owning commercial property when the real estate market is bad; you don’t have to try to unload at an inopportune time, and potentially lose money.
- Tax deduction: Even though you’re paying rent to someone else, you may be able to receive a tax benefit by writing off the lease costs against business income.
On the flip side, though, you might not be able to customize the property to fit your business needs. Additionally, there is a chance that you will be forced to relocate when the lease is up. If the owner of the property finds a tenant who is willing to pay more, your lease might not be renewed.
Many business owners choose to lease until they really get their businesses going. Buying commercial real estate too early in the game – especially if your business finances are highly leveraged – can lead to financial difficulties for you and your business if something goes wrong. Buying commercial real estate makes more sense after establishing a successful track record for your business.
Buying Commercial Property
Commercial real estate expert Chris Hurn agrees that buying commercial property to house your own business can be a savvy move. In his 2012 book The Entrepreneur’s Secret to Creating Wealth: How the Smartest Business Owners Build Their Fortunes, Hurn points out that one of the best way to grow your wealth as a business owner is to buy commercial property. You don’t have to worry about being forced to move. It’s possible for you to alter the real estate to fit your specs, and you don’t have to worry about the rent going up.
Another advantage of buying commercial property to house your business is the possibility of selling the property later at a profit. Or if you decide to keep it, you may be able to lease it out to other businesses. Indeed, if you don’t need the entire property for your business, you can get other businesses to move in – and help you pay the mortgage, taxes and insurance, as well as contribute to upkeep and maintenance costs.
Later, when you retire, Hurn says in the book, you can simply lease out the entire property, and use the income to help support your desired lifestyle.
One of the main downsides to buying commercial property is the fact that you are wholly responsible for the property. You either have to hire someone to manage it for you, or you have to take time away from building your business to manage it. The other downside is that real estate taxes and insurance, while usually deductible, tend to rise over the years and often make the property more expensive to own.
Still, there are enormous tax advantages to owning commercial real estate. Depending on how you set up the ownership of the property itself, you may be able to make a significant dent in the amount of federal income tax you pay personally. And, you may be able to leave a significant tax-managed asset for your heirs.
If you decide that buying commercial property for your business is the way to go, Hurn’s book recommends the SBA 504 loan. This loan program offered by the Small Business Administration is expressly designed to help small business owners with large capital expenditures for property.
There are pros and cons to both leasing and buying commercial property. You need to weigh your options, and decide what is likely to work best for your business at this time. Before making any moves, consult with a business attorney, an accounting professional and a real estate attorney to understand whether buying or leasing real estate is the better move and how it will affect your business’ bottom line, and your own.
Miranda Marquit is a freelance writer and professional blogger specializing in personal finance, family finance and business topics. She writes for several online and offline publications. Miranda is the co-author of Community 101: How to Grow an Online Community, and the writer behind PlantingMoneySeeds.com.