As a business owner, your company's future growth likely lives rent-free in your head. But with all this talk about office space woes, what part does your business's commercial property play in furthering that growth?
That question inevitably begs another: Should you buy commercial property to house your business operations or find commercial property for rent? The question of buying versus renting is an important one that requires time and research to answer.
We know: That's a lot of questions. But that's why we're here to help. In this quick guide, we'll discuss the pros and cons of buying vs renting commercial real estate as well as the factors that should influence your decision.
Let's get started.
The primary advantages of finding commercial real estate for rent are business flexibility, mobility, and lower risk.
When you lease office space or rent retail space, you won't be tied down to a tangible asset. Renters don't have to worry about property management, and it's easier to break a lease than to sell a piece of property.
Renting typically has lower upfront costs: You won't have to worry about down payments, loan servicing fees, closing costs, etc.
Depending on the type of lease (i.e., gross or net lease), landlords might handle most repair and maintenance work.
The main pitfalls of finding commercial property for rent are restricted property control and the lack of a tangible business asset.
Renters have limited control over the property they're using and typically must seek landlord approval before making any modifications.
Renters won't build equity in the property, so they can't leverage it as a financial asset and reap investment returns as a result.
The key benefits of buying a commercial property are property control and the advantages of owning a real property business asset, such as tax benefits and financial collateral/leverage.
Commercial property is a business asset that appreciates in value. Businesses can leverage their commercial real estate assets, as a result, for financing or sell the property if they need cash.
When you own commercial property, you have complete control over the space. You can change the floor layout, add extra rooms, and make updates and upgrades as you see fit without getting permission from an owner.
Commercial real estate investors can take several tax deductions on operating expenses, property depreciation, mortgage interest, and more.
Business owners can make extra income from their commercial real estate by leasing and subleasing the property to tenants.
The major downsides, however, to buying commercial property are the commitment and risk.
Buying property has a much higher upfront cost than renting between down payments, servicing fees, agent fees, and closing costs.
Building owners also typically handle the bulk of maintenance and management responsibilities.
Buying commercial property is not a weekend task. Buying a property can take months of planning, during which your business's financial situation can change.
Property markets change every day, and a commercial real estate investment can lose value. Losing value, therefore, makes it harder to sell property and get it off your hands.
The decision to buy or rent is not something you should take lightly, so consider carefully the following factors.
Even if your cash flow and business financials are positive, you might not have liquid capital to cover the initial down payments when it comes time to purchase, so budget carefully.
What are the near-future plans for your business? Are you still focusing on rapid growth, or do you have a slower, steadier plan?
The lower commitment to renting is a positive for younger businesses that need to remain flexible and mobile while they grow and establish a consistent market presence.
Surrounding market conditions should also have an impact on your system. General falling property value trends, for example, could be a reason to rent instead of buy.
What kind of needs does your business have? Do you need a permanent space to set down roots and grow, or do you need a temporary space that you can vacate when necessary?
The potential return on any commercial real estate investment also matters. For example, say you've found a retail space and are deciding whether to buy it or rent it.
Monthly mortgage payments might be more than monthly rent, but asset appreciation and building equity could make the overall ROI of the purchase worth the higher upfront cost.
According to one case study from Mazirow Commercial, Inc., one tenant managed to secure a $45,000 annual rental discount thanks to smart lease renegotiation.
The company smartly assessed its financial situation and ended up saving a significant amount of money.
The key to making the right decision is understanding your business priorities. The main tradeoff between renting and buying comes down to flexibility versus control. You also need contingency plans in case the state of the market changes.
If you're a first-time renter or buyer, we highly recommend working with a real estate broker. Aside from providing general advice about commercial real estate, brokers can help you find the right properties and gather the appropriate documentation.
Deciding between buying and renting your commercial property is one of the most important decisions you'll end up making for your business. Whether you're looking for a garage to rent or want to buy out an entire office complex, due diligence is key.
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