Should I Buy or Rent a Commercial Property?
Updated: Aug 22
So you've moved your business from your home to a retail or commercial space, but now you have to pay rent. While this may seem frustrating, it may be in your best interest to continue paying for the right to use someone else's space and let them deal with the issues of ownership. Or maybe the time is right to simply buy the property and stop paying rent.
Below are some questions to help you determine if commercial real estate ownership is right for your business:
Will the building help your growth or slow it down? See how fast your company has grown and try to predict how much space you will need in the future. If you're growing fast, you don't want to limit yourself to the small storefront you're in now. On the other hand, if your building has adjoining spaces full of other tenants, you may be able to grow on-site gradually by taking over neighboring tenancies.
Can you pay the mortgage? Calculate whether your monthly costs would increase if you took out a mortgage. Is it much higher than the rent you were paying? If your business cannot afford the increased costs, this can cause cash flow problems.
Can you pay the deposit? Commercial building purchases can require high down payments, usually around 20%. If this payment puts your business in a financial bind, it may be better to hold off on owning the property.
How much control do you need? You may eventually need to drastically change your space as your company grows and discovers its own identity. For example, you can paint all the walls blue, tear down walls, or install heavy machinery that would be difficult or expensive to remove. Most landlords will not allow such modifications, especially if they are prohibited in your lease. By buying a building, you will gain much more control over your own business and remove obstacles that would hinder its growth.
Will depreciation be possible? If your business is profitable, owning real estate can reduce your tax burden. You may be able to write off a portion of the cost of the building each year in the form of depreciation. Another option is to buy the building personally and then lease it to your company, an ownership structure that has certain tax advantages.
Is there a good building available? Research the market to see if it's better to buy your existing building or find a more desirable location nearby. Keep in mind that moving and changing locations will increase your business costs and require advertising to let customers know where you've been. An experienced real estate agent should help you with this research.
Are you ready to be a landlord? Maybe you're tired of dealing with a landlord, but are you ready to become one? If your building has other tenants, you will have to deal with all kinds of problems that arise and make difficult decisions, from building improvements to raising the rent. Do you have time to adjust to these additional responsibilities? Do you have the necessary management skills? If not and you still want the property, consider hiring a good property manager.
What is its potential as an investment? Step away from your business for a moment and remember that owning real estate is an investment in itself. You may have to sell the building in the future, which can make you money even if the business goes bankrupt. For example, you might want to buy a building that you know won't attract as many customers if you think the value of the building will increase enough to make up for the lack of sales. Is the building in a thriving commercial district that is popular and full of tenants, or is it mostly vacant? Explore price trends. Will you be in the place long enough for it to increase in value?
In short, a tenant's decision to buy a commercial property requires a large investment of research and judgment. A commercial real estate inspector, from LiteHouse Commercial can help.