Renting vs Buying a Commercial Property – What Makes More Sense?
One of the most important considerations business owners need to make at some point is also the question real estate brokers receive quite often. What is better, renting vs. buying a commercial property? As it is with all options that have their pros and cons, the answer lies in a customized analysis of every business. Prepare yourself for deciding on the right office space by examining the logic behind each option – leasing and owning.
Which factors will determine your decision?
There isn’t a one-size-fits-all answer to the dilemma of renting or buying commercial space. As a business owner, you are familiar with difficult decisions, and this important investment is simply one of them. Mainly, it is because it affects a business in profound ways long-term. A rushed decision can hamper your progress or lead to a fiasco.
Hence, leaning toward each option will depend on carefully examining your goals, expected growth, and budget. In other words, you would have to look at your business strategy through the prism of available funds and short and long-term expansion plans. Still, there are general guidelines that can help your preliminary analysis.
When should you lease a commercial property?
When does renting vs. buying a commercial property go in favor of leasing? It comes as a logical choice for startups, small companies with limited access to funds, but also mature businesses under specific market conditions.
You’re under a tight schedule to find office space
You need a commercial space and you need it now. If you need office space on short notice, that is, within one to two months, you will sooner find a lease with favorable terms.
You can’t spare time for property management
With office space rental comes bigger flexibility. That way, you can leave commercial property management to experts and dedicate your time to business endeavors. Nevertheless, you are still paying the maintenance fee.
Your access to capital is limited
You may not have sufficient funds to tie in a down payment, but you can afford to rent without overstretching your budget. The consequence of renting is more liquidity.
Uncertain market conditions
If you are doing business in a market with unstable conditions, the fewer ties you have, the better. It is easier to break a lease than go through the process of selling commercial property on short notice.
It’s too soon to predict your growth rate
As an owner of a young, growing business, you can hardly foresee how soon until it outgrows the office space. And even if you need to relocate your business soon, you can do it like a professional mover, safely and quickly out of your rental.
Affordable access to attractive locations
Reaching a target audience in a prime location with a limited budget goes in favor of renting. Startups often take advantage of leasing commercial space in an area beyond their purchase limit to get closer to clients and jump-start the business.
When is it clever to buy a commercial property?
If you prize the liberty of making all the decisions and managing the property as you see fit, consider owning commercial real estate. It is initially a more expensive investment, but it has great potential for return, tax savings included.
You depend on the liberty of choice
The freedom to adapt and personalize commercial space to optimally suit your business needs can be a sufficient reason to purchase it. No need to conform to the landlord’s rules, although maintenance duties, repairs, and expenses will fall upon you.
You can afford to invest in real estate
Whatever your business goals, investing in commercial property is lucrative, simply because you’re building equity. Besides, with real estate in your possession, should you need to close the doors of your business, you can always open them to tenants. You will get an opportunity to use one part of it and generate additional income by renting the remaining offices to other companies.
A safeguard against possible crisis
Buying commercial real estate can serve as a safety net in the case of recession. Ability to bounce back after an economic crisis has become a major consideration of business owners who faced it in 2008. And especially those who haven’t should take the possibility into account. Even if your business doesn’t survive, you will have real estate to fall back on. The less you owe on the property at the moment, the faster the recovery.
Taking advantage of tax savings
If you wonder about the tax implications of renting vs. buying a commercial property, note that you may be eligible for tax deductions for commercial real estate owners. As a landlord who actively manages a commercial property, you can save 20% on taxes of your qualified business income through QBI deduction. Otherwise, you may claim depreciation on your commercial rental property.
Invest in your own expansion
Commercial property owners build the long-term wealth they can partly use toward supporting future growth. Moreover, any improvements you invest in will add value to your property. As an owner, you will have to make these improvements only once; as a renter, you might need to make them in every space you lease.
No need to worry about a down payment
By providing help in acquiring fixed-rate long-term financing available through the 504 loans, the U.S. Small Business Administration (SBA) assists businesses in the purchase of commercial real estate.
Fixed-rate payments that build equity
A property owner with fixed-rate loan financing is in a favorable position compared to a renter of commercial property who has to worry about the rent increases. Not only won’t your payments change while you’re paying off a mortgage, but you’re also building equity at the same time.
Time to Decide
The fact there are two alternatives doesn’t make this important decision any easier. The good news is that there are plenty of diverse commercial properties to rent or buy, whatever your ultimate conclusion. The bad news is – you still need to make that choice of renting vs. buying a commercial property and stand by it. Luckily, you don’t have to ponder it alone. Team up with experienced consultants and start accomplishing your professional goals.