Buying vs. Renting Commercial Property
Moving to new premises is a defining moment for any small business, a crucial decision that makes or breaks the success of the organization. Naturally, the main dilemma is whether you should rent or buy the space.
You want to choose an option that is a safe bet for you, alas, there are many aspects to factor in and the equation is seldom simple. The economics of buying and leasing differ in more than one way and have varying long-term and short-term implications.
A matter of perspective
Renting the property has one obvious advantage. The initial outlay of cash required to obtain the use of the asset is much lower compared to purchasing it. For small businesses, this makes a difference between blowing the budget and staying within its limits.
They have to avoid biting off more than they can chew. Still, focusing only on the short-term availability is not advisable. Namely, buying the space has a big advantage if you think in the long-term: You end up paying less than you would have paid if you rented the property.
Grasp the numbers game
It is highly advisable to conduct a thorough analysis and see how your net cash flow would look like in the wake of leasing or purchasing a suitable commercial property. The goal is to come up with an estimate of how much cash you have to set aside for the purposes of covering the full costs of property acquisition.
These calculations encompass multifarious factors such as purchase, financing terms, lease terms, federal and state income tax rate, depreciation, asset’s estimated value, the cost of capital, and other expenditures that may kick in.
Limits of control
There is a host of other factors that could be relevant to your situation. One of them is certainly the control of the property. Many small businesses rightfully seek for spaces they can upgrade, spruce up or renovate.
When you rent a facility, however, you usually have to ask for a landlord’s permission. Purchasing a property is much different as nobody looms over you and impedes your vision. So, in this regard, buying wins by a landslide.
Flexibility or security
Then again, leasing involves another kind of flexibility that might be important: If you grow out of space or it no longer accommodates your needs, you are not tied to it forever. The same goes for a scenario when you are faced with rent escalation or when the expansion cannot be pulled off.
Yet, what if you find a stellar business location you would like to stay in for years to come? Owning a facility is a better option in that case because you do not have to worry about losing such a great competitive advantage.
Buying a space has a few other advantages. Firstly, properties in a hot area of appreciating land values promise great returns if you sell the property one day. You are not in a position to do this when you are paying the lease, of course.
Secondly, owning a property can allow you to achieve tax savings. And if you financed the purchase yourself, then interest paid deductions should also be available. Cutting the tax bill is sometimes more pertinent than saving money right away.
Rent, after all?
The fact remains that for small businesses, cash flow in the early years is of the vital significance. A lump-sum purchase price can be too much to handle, unlike leasing the space. Another expenditure you may steer clear off is maintenance.
Leasing arrangements often assign this duty to the landlord. You are free from worrying about the structural soundness of the building or its street appeal. Finally, some business owners struggle to find a suitable commercial property to buy or they feature declining real estate values.
Think big, start small
Keep your options open and weigh the pros and cons of each option carefully to figure out which one makes more (financial) sense. Stay on top of facts and figures and ensure that the new space is a stepping stone towards success, not a hurdle on the road to it.
Strive to think beyond upfront costs: Evaluate how the decision of today impacts your business over a long haul. Make an informed decision because it is likely the biggest one you will reach in the early stages of your entrepreneurial endeavor.