If you’re launching a new business that will require an office, warehouse, storefront or other real estate, you’ll either need to lease or buy your space. That’s a given, but the decision to either go all in and buy versus leasing isn’t so easy, as both bring positive and negatives, so weighing both options could make a difference with how successful your new business is.
Both leasing and buying have advantages and disadvantages that can change as your new business grows. Depending on what type of business you’re starting, or are already running, the best strategy might be to own and lease at different points during your company’s lifecycle.
Understanding the pros and cons of leasing or buying your new business location will help you make the right decision for your company, not only as you start the business, but also as you run your company many years down the road.
Before you start looking at the pros and cons of owning or leasing your new business real estate, look at the costs to move in to any space. To compare apples to apples, just focus on your move-in costs. Don’t include expenses you’d have whether you lease or buy, such as utilities, insurance and furniture.
If you lease your space, you’ll need to budget for a deposit, monthly rent and possibly build-out costs. If the space is move-in ready, you won’t need to pay for any modifications. For example, if you’re leasing space for a restaurant, look for a location that’s a former restaurant and comes with a dining room, bar and kitchen equipment, such as stoves, ovens, refrigerators, and such.
If you buy your business space, your costs will include your down payment, closing costs, monthly mortgage payment, annual property taxes and build-out costs. That’s important to know as you put together your business plan and budget.
Equity. If you have limited startup cash, you’ll spend less money leasing than buying. You can use the money you save by leasing on hiring better employees, doing more marketing and buying more equipment and furniture. However, every dollar you pay your landlord is gone for good.
On the contrary, if you buy your property, you’ll begin building equity. In the future, you’ll be able to borrow against your property to fund your operations or an expansion. Your new business will also be worth more when you’re ready to sell it or retire.
Flexibility. If you want to knock down walls, redecorate interior or add space, you don’t need permission from a landlord if you want to make changes. Owning your property allows you to more easily sub-lease your unused space while you’re growing and increasing your profits. Consider how quickly and affordably you might need to be able to change your business layout or move your location in the future. If you do need to move your business location, it might be easier and quicker to do so if you’re leasing.
If you’re in a hot real estate marketing, a building you own might be easy to sell. If you have a long-term lease, you’ll have to deal with early move-out penalties. You can lease a new space while you’re selling a building you own, but you’ll be paying double rent each month until you sell your property. Selling a property also comes with closing costs.
Stability. When you own your space, you know what your monthly mortgage will be and you won’t have to worry about being kicked out by a landlord who may be open to selling the building. If you rent, your landlord will often keep an eye on how you’re business is doing and jack your rent if he or she sees that you’re doing well. This will be especially true if you’re a retail business and have been given a good deal to move in. Landlords know that, once you’ve established your customer base, it’s not a good idea to switch locations.
Occupancy Costs. When you rent, the landlord takes care of maintaining the property, providing security and paying the property taxes. Make sure to estimate the occupancy costs of owning a property, which can include fixing leaky pipes, HVAC units breakdowns, landscaping, security, cleaning fees, light bulbs and other small things often overlooked by new business owners.
Tax Benefits. Check out the tax deductions you get when owning. In addition to a mortgage interest rate deduction, you’ll be able to write off all of your building operating expenses. You might also qualify for local, state and federal tax deductions; such as for installing a green roof or adding solar panels.
Local utility companies also offer businesses attraction and retention rates to help an area generate jobs and future power usage. In some instances, local and state economic development agencies have a database of low-cost or even free buildings they’ll give you if you’re going to be creating jobs and taxes.
Lead image via Getty
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