Should I Lease Or Purchase A Commercial Property? Here's What You Need To Know
If we gave you $1,000,000 to help your business grow, what would you spend it on?
More equipment? Additional employees? Extra advertising? A better building?
We’re sure you would have no trouble spending that million dollars. The hard part is having the space and layout to accommodate for your successful growth. Having 10 new employees but no room for more workstations isn’t a good pairing.
Okay, so it’s time to face the music. You need to find the next location for your company but aren’t sure if you should purchase a building or rent a different space. We put this guide together to help you decide what will fit your needs best.
Ownership: For The Champion Business Person
Owning a commercial property is a big commitment that offers an even bigger reward. This is the long-term “all in” play that can turn into an actual jackpot when it comes time to cash out in the future. Winning big usually comes with serious risks, to borrow from Uncle Ben in Spiderman, “With great power comes great responsibility.” Ownership is a big responsibility, especially with the success of your company (and bank account) hanging in the balance. Check out the list below to decide if purchasing a property is the best next-step for you.
Cash Flow & Retirement
When your company occupies a building YOU own, YOU receive the rent each month, not a random landlord. Your company still pays “rent” like normal, except you get to deposit that right into your mortgage payment. Now every dollar you make truly works for you, instead of losing it to an outside source. When you eventually decide to retire, you can still collect rent checks every month, forever. There is a historic demand for more business space, and the returns in commercial real estate are typically higher than the stock market or other investment assets.
Not only do you receive monthly income now (instead of losing your paid rent money to a landlord), you also have a real, physical, asset that has a hard-number value. This can be sold at some point in the future for a huge return. Holding real estate is the greatest hedge against inflation known to humankind. As other daily life costs go up, so does the value of your property. A well-maintained property can keep a desirable appearance for decades. We often see property owners cash out years after they get an asset, selling their building for several times the value they purchased it for. At the end of 20 years, will you be holding a bag of receipts for paid rent or a free-and-clear property deed?
As the owner of a building, you can receive several extra tax breaks you would not be eligible for if you were renting somewhere. Completing property maintenance and general upkeep can be written off to the tune of thousands of dollars each year. With the new tax laws put in place in 2018, full maintenance costs can now be written off in the year completed instead of amortized over 20-30 years. You might also be eligible to deduct up to 20% of your net rental income with the new pass-through tax ruling. Don’t forget about general depreciation deducts and other miscellaneous building work that can go to making a big difference on your annual tax bill.
Combining the power of being a business owner WITH also being the building owner gives you total control. You save time and sanity not dealing with a cantankerous landlord who doesn’t care about your needs or requests. You can make layout changes that boost efficiency, switch vendors at will, and make the best decisions for your interests. Skipping the “we have to ask the landlord” line is an amazing freedom to have. If you hire more employees and need a larger open area, knock down a wall and add more cubicles overnight. It’s true when people say it’s the little things in life. Choosing a fresh paint color, modernizing the carpet (sorry, blue 80s pattern), or getting new blinds that actually open and close is worth writing home about.
With the Total Control from above, comes stability. As the property owner, you have secured a long-term location without fear of moving in 3-5 years. There is no lease expiration date, no landlord to change tenants, and no stressful negotiations year after year. You own the building and can keep your business there for as long as you want. Another HUGE benefit is the stabilized cost of occupancy. You know how much everything costs to keep the lights on and run your company. Never deal with yearly rental hikes, new CAM charges, or other hidden fees ever again. One location, one rate: forever. Having this security can be a great advantage over a competing company who is still leasing. They will have to lose time and money dealing with lease renewals, rent increases, and location moves every few years. Your company will stay at 100% production with no lost revenue, and fixed over-head costs.
Leasing: For The Flexible Nomad
Leasing (renting) a commercial property is an option to secure a business location without committing for all-time. There are some downsides, including some that most people don’t consider. See the full pros and cons below!
In the short term, the cost of occupancy is generally more affordable to lease rather than own. This is especially important if your business needs the largest space available right now; maybe in a size that wouldn’t be affordable to own. Occupying a bigger building to increase your revenue can flush your company with cash flow, without shelling out a higher cost per month forever.
Wait didn’t we just talk about this in the budget section? Not exactly. Capital allocation goes back to the $1,000,000 that I offered at the top. You could put that money toward building ownership costs OR use it to buy products and supplies for fueling company growth. With leasing, the down payment (security deposit) will be a fraction of the down payment needed to buy a property.
Often, it is much easier to meet a landlord’s renting criteria vs qualifying for a big-league bank loan. Sometimes it can feel like getting approved for a loan is harder (and more intrusive) than trying to join the CIA. With a landlord, it’s just two people, you and her, coming to a rental agreement on the space.
With a set lease term, you have the ability to move, negotiate new terms, or find a better solution at a locked-in date in the near(ish) future. If you aren’t sure where you see yourself in 5 years, leasing can give you the freedom to pull up the stakes and go whenever you decide to move your company or home. You are free to vacate at the end of your lease, and can even use a sublease option to move prior to the deadline. Unlike with owning, there is no waiting period, listing window, or offer stage.
Another big reason to wait on purchasing is if you are expecting to significantly grow in the following few years. A solid growth rate combined with a lease allows you to continue moving into bigger and bigger facilities as your company continues to scale upwards.
In a booming economy, commercial vacancy rates can drop to only 1-2% of properties being available. Even if you want to own, there might not be a matching building for sale for months, or longer. You have to ask yourself, “Do I only want to grow my company if I can own a building?” The answer would be NO! Make more money now while the getting is good; figure out a forever company home later. Getting held back on years of increased revenue because you're waiting for a building to own is a harmful trade for a less-than-ideal reason.
In the “often overlooked category”, we have midnight responsibilities. When leasing a property, you don’t have the responsibility of fixing a broken pipe, leaking roof, cracked parking lot, or other property work. There won’t be any 2am calls to contact a plumber to resolve an issue, or to show up at the crack of dawn to approve slurry coat/paving work. They say it’s the little things in life, and avoiding one more list of worries sure qualifies in our book.
Now that we’ve laid it out, which option seems the best step for where your company is heading? Will you buy a bigger and better building or seek a flexible lease option while waiting to see what the future holds? It’s a big decision, one that involves a large amount of money either way. Don’t put all the pressure on yourself to make the right decision. Talk to our team of local commercial real estate experts to get a free, professional opinion on what could be the best option for your current situation. Use our easy form below and one of our property specialists will help you ASAP!