Buying vs. Renting Retail Space for Your Business

Published: 03-28-22    Category: Investing

Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.

Buying vs renting retail space

One thing that the pandemic and now-post pandemic era has taught all of us is that there are no guarantees in any business. Industries that were once held up as “too big to fail” had to either close their doors or try to pivot into different operational strategies.

Whether you’re looking at buying retail space or figuring out where to rent retail space, the chances are good that you’ve had to make some changes to keep up with the current and uncertain times.

How’s Retail Doing, Anyway?

Despite the doom and gloom estimates, retail is still looking good. According to Shopify’s recent study on the future of retail, over 47% of consumers said that they were more likely to purchase from a business due to its in-person local presence.

So, how do you know whether these trends mean that it’s time to buy retail space instead of renting it?

Look at the Benefits of Buying Retail Space First

The psychological pull to own something is pretty strong, and that’s not something to ignore easily. To make a more informed decision, here are some of the benefits of buying retail space:

  • In the right markets, owning retail space is powerful. The space grows in value as the community grows, and high-demand markets have a long list of potential tenants.
  • Buying can be superior to renting in markets that are prone to sharp rent increases. A building that you own is something that can’t be taken away easily.
  • The space is infinitely customizable; you are only bound by zoning restrictions, your budget, and available materials.

The power of owning your own space means that you have the ability to change things to your heart’s content. If the area around you grows, then you benefit first. Compare this to a tenant that does not earn equity on the property.

The Pitfalls of Buying Retail Space

Of course, nothing in the commercial real estate world is without its share of pitfalls. Here’s a few to consider with respect to buying retail space:

  • Buying a property ties up resources that could be used elsewhere, including into other properties with higher potential for income generation.
  • When you buy instead of rent, you’re on the hook for everything: the maintenance, the taxes, the insurance, the upgrades, and anything else that comes up.
  • More money is required upfront for a down payment versus a lease agreement with a landlord.

If the area cools off, you’re left with a property that isn’t as valuable as it once was. This means that it can take a lot longer than meets the eye to get the property sold.

While some may be interested in the location, it is unlikely they would pay anywhere close to what it’s worth if the market cools down.

The Benefits of Renting Retail Space

So, if buying isn’t the answer, what about going to rent retail space? That’s where things get interested in terms of benefits, such as the advantages listed below:

  • Renting a retail space is flexible, something that newer companies need the most: if things begin to cool off, you simply go to another location at the end of the lease.
  • With the right lease agreement, the landlord takes on a lot of the expenses, leaving you to focus on your business growth.
  • If property taxes go up, then the landlord is on the hook for that. Your rent could increase after your lease ends, however.

One of the most overlooked benefits of renting retail space is that you can simply upgrade quickly as the business grows. Sometimes you just can’t expand in an existing space, but a new space is easier to find in some markets than first imagined.

The Cons of Renting Retail Space

Renting retail space isn’t without its share of disadvantages, of course. Here are a few to consider:

  • The property owner can decide not to renew your lease, which means finding a new retail space.
  • There could be restrictions on how you can modify the space.
  • The lease requires good negotiation, or you could be on the hook for more than you bargained for (maintenance, taxes, etc.)
  • There is no opportunity to earn equity in the property, which means the property doesn’t add to your real estate portfolio.

Other downsides may play a role in your situation, such as rents rising in your area or other issues that arise. Ultimately, having enough cushion to make it easy to move in a different direction is key.

The Lease Agreement is the Gateway to Success

Choosing to rent retail space doesn’t mean that you’ll rent forever. It just means that for a set amount of time, you’ll rent the space you need for your business. There are a few questions that you’ll need to get out of the way, of course:

  • What type of lease agreement are you looking for? Gross lease, or net lease?
  • How much money are you planning to spend every month on renting space?
  • Are there must-have renovations necessary for your specific business?
  • Do you already have an operating budget set?

Everything with a potential landlord is about negotiation. Building a plan that benefits both parties is better than one party walking away feeling like they’ve been cheated.

Building a Sensible Retail Strategy

Like with any other commercial real estate activity, proper planning is an absolute must if the goal is to rent or buy retail space. The truth is that there’s no universal answer. Some people have businesses that are seasoned enough that it makes sense to buy space.

However, if you’re finding that your business is still in that sweet growth spot, it’s time to think about going to rent retail space instead.

Ultimately, the goal here is to give your business the chance to grow without risking everything. There are plenty of horror stories online about someone buying space for their business, only to suffer an economic setback. Tread lightly for long-term success.

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