Leasing or Purchasing Property
When it comes to starting a business or changing locations, business owners are always faced with a choice. Do I lease or purchase the new property? Before you decide, consider the advantages and disadvantages to your business.
Advantages to Leasing a Property
- No Initial Down Payment – Starting a business takes money and a down payment is not required when you lease. Many small businesses may not have enough starting capital to afford a down payment and bypassing this step allows them greater flexibility to invest in potential growth.
- Quicker Move-in Time– A leased property has already been constructed, so you can move your business into the area right away and begin working on your bottom line.
- Reduced Investment Risk – Nothing can be more devastating to a business than spaces that do not work out. If your property no longer meets your spatial requirements or you need to move to a better location, leasing allows you to vacate quickly with minimum
- No Property Maintenance – The property landlord may be responsible for maintenance, so you are covered if something goes wrong like a failed HVAC or faulty plumbing. Landlords may also provide tenants with an allocated portion of money based on square footage to make upfit improvements prior to leasing.
Disadvantages to Leasing a Property
- Lack of Control – When leasing, you are not in control of your building. If your property begins to look run down it is up to the landlord to decide to renovate. You also have a limited amount of freedom to alter the interior to fit your needs.
- Limited Returns – Over time you will spend more money leasing than you would owning. You will also not be able to sell the building when you vacate and see a return on your investment.
Advantages to Owning a Property
- A Return Investment – Purchasing a property pays off over time. Each year you can write off the depreciation value on your taxes and when you are ready to leave, you have an asset to sell. If the property value has appreciated, you may end up selling for more than you paid, making it a sound investment.
- Complete Control – Being the owner is a powerful experience. You have total control over the standard of the property when you buy, allowing you to renovate, expand, or alter the interior when you see fit.
- Additional Revenue Stream – If you purchase a property larger than your business requires, you can set up shop in the prime space and lease the remaining area to other businesses. The additional revenue will help boost your profit margin.
Disadvantages to Owning a Property
- Large Upfront Cost – In addition to cash acquisition cost or a large down payment for a commercial mortgage; you may have rezoning, repairs, insurance coverage and property tax escrow. You also have to consider the continued maintenance cost for the duration of your ownership.
- Vacancy – If you purchase larger space for additional leasing, you may run the risk of long vacancies. While portions of your property are vacant, you are responsible for all associated costs. If you experience a high tenant turnover rate, you will need to consider the renovation costs required to deconstruct and upfit your space more frequently.
- Municipal Changes – Zoning restrictions and changes may hinder future plans for your property. Items like handicap bathrooms or ground permeation may not be an issue when you purchase, but may be required for future infrastructure. Additionally, future renovations of your property may no longer be grandfathered in and have to be updated to the current guidelines.