What factors should you consider when deciding whether you should buy or lease a commercial property?
The following factors, if relevant to your situation, may lead you to conclude that you should purchase, rather than lease, your commercial property:
- You want control of the property. Maybe you intend to make substantial additions or renovations to the property. Or you decide to change your business hours or change something else about the way you are doing business. If you rent your facility, you may have to get your landlord’s permission to make these changes. If, however, you own the property, there will be no one looking over your shoulder (expect maybe the zoning board!) to question your moves.
- You can consider the long-term cost. A lease may sometimes beat out a purchase in terms of cash flow, particularly in the early years. But over the long haul, a purchase is usually cheaper because a landlord, in addition to paying all of the costs associated with purchasing and maintaining the property, will attempt to build in a profit for himself. You can avoid paying this profit premium by buying, rather than renting, the property.
- For some businesses, such as certain retail and service businesses, location is all important. If you have established a winning business location, you don’t want to lose it because of a rent escalation or because the landlord just wants the property for another use. If you own the facility, you won’t have these worries.
- You haven’t found a suitable property to lease. You may want to lease, but have found all properties that would be suitable for your needs have been offered only for sale, rather than lease.
- You are in an area of appreciating land values. If you will locate in an area where you think land values will continue to increase, it would be better to own the property (and thereby get the benefit of this appreciation if you ever sell) rather than to rent it. This is would be particularly true if you are able to spot this real estate trend before prices jump up in recognition of it.
- A purchase may bring you tax savings. Although, unlike rent, the money you use to purchase your facility is not deductible, you are allowed to recover this outlay over time by yearly depreciation deductions. If you financed your purchase, interest-paid deductions are also available. Depending on several factors, such as how long your have been in business, how profitable your business has been, and what portion of the purchase price or rent relates to the land itself — rather than to buildings — a purchase may actually cut your tax bill when compared with a lease.
On the other hand, the following factors, if relevant to your situation, may lead you to conclude that you should lease, rather than purchase, your business facility:
- Your current cash flow is of vital importance. Particularly in the early years, a lease may be better than a purchase from a cash flow perspective. This is because up-front outlays associated with a lease are usually less than those required with a property purchase. With a lease, your main initial cash expense may well be limited to your security deposit, plus first rent payment. With a purchase, you have to have the lump-sum purchase price, or at least a down payment on a mortgage.
- You don’t want maintenance duties. Many leases place the duty of maintaining the property on the landlord. Examples of such maintenance can include the things that are necessary to ensure the continued structural soundness of the building (such as roof repairs and periodic maintenance and maintenance of heating and cooling, electric, and plumbing equipment), and those that go to the facility’s ease of use and appearance (such as snow shoveling of walkways and parking lots and cleaning of windows and common hallways).
- You want to retain your mobility. Maybe you’re not sure that the facility that you will select now will serve your needs several years in the future. You may need more or less space, your target market may have moved elsewhere, or better-suited properties may later be built.
- Your company’s credit rating may not support a mortgage. If your business is rather new, or has experienced some financial difficulties, lenders may not be willing to extend it sufficient credit for a mortgage on the facility. With the same financial situation, however, a property owner may well be willing to rent a property to your business.
- You haven’t found a suitable property to buy. You may want to buy, but have found that all properties that would be suitable for your needs have been offered only on a lease basis.
- The facility may be in an area of declining real estate values. You may find a facility that meets your needs, but you are concerned that the real estate values in the area are stagnate, or may actually drop in value. In this case, leasing makes sense: let the landlord suffer the effect of the declining values, not you!
As you now know, there are many factors every small business owner needs to consider when getting ready to make the decision whether to buy or lease a commercial property. Let Shetland Properties help you make the right decision that is best for your business. Contact us today!