For a business owner, deciding whether to buy or lease a commercial property can be challenging. Leasing options have grown throughout time, making renting business property an increasingly appealing alternative to ownership, which may have previously been the sole option. This post will look at 7 variables that can help you decide whether to buy or rent a commercial property for your company.
1. Geographical Needs
Your company's ideal location will rely on the nature of your industry, your target market, and your unique requirements. This may then determine whether you should purchase or rent a commercial property.
There will be fewer possibilities to lease a home, though, if you require specific modifications, need more control over the property, or have dangerous items. So, if you intend to stay in a place for a long time, purchasing a commercial property can make more sense.
2. Needs for Operations
Your operational requirements will define a lot of your location requirements. You'll have more options to buy or lease a business property if you don't need specialized renovations. If so, you might be able to find suitable business property for rent at a very reasonable price. There will be fewer possibilities to lease a home, though, if you require specific modifications, need more control over the property, or have dangerous items. So, if you intend to stay in a place for a long time, purchasing a commercial property can make more sense.
3. Commercial Stage
Due to the high upfront expenses, very few startups or early-stage enterprises can afford to buy a commercial building. In order to qualify for a commercial mortgage in Canada, a building investment must have at least 20% down in addition to additional requirements that most newer enterprises are less likely to achieve.
Growing companies should think about their future space requirements because renting a commercial property is more flexible in the medium term. Additionally, expanding companies should think about the opportunity cost (see below) of purchasing versus spending the funds in expanding the company.
More established companies might discover that the property offers a sufficient return on investment to justify investing in a long-term location. Due of this, purchasing instead of leasing may appeal to these companies more.
4. Opportunity Cost
The decision to purchase or lease a business property will depend on a number of potential trade-offs. The CCIM Institute advises you to conduct a thorough financial study of the cost vs. benefit of purchasing vs. leasing a business property in an article that models the costs and advantages of ownership (or have someone else do it for you).
For instance, a larger down payment is required when buying a commercial property than when renting one, which results in a higher upfront cost. The corporation now has less money available for other uses as a result of that payment.
Therefore, a business owner should assess if leasing and spending the same amount of money into their company will yield a higher return on investment (ROI) than owning a commercial property when weighing the buying alternative.
5. Owner Investment Objectives
When considering whether to purchase or lease a commercial property, the owner of the business should also take their long-term investment objectives into account. The majority of small business owners invest a sizable portion of their capital in their company. Real estate ownership may make sense as a means of investment diversification for some owners.
The benefit of this sort of investment is that it allows the owner's current investment in the company to be leveraged into rising equity in a commercial property. There can also be a chance to become a landlord and generate additional rental income, depending on the property. Finally, if the owner sells the company, they might be able to maintain the property and continue to rent it to the new owners, which could generate further money in the future.
6. Regarding Taxes
Different expenses are written off for leased versus owned business property. For leased property, the entire lease payment is often incurred. On the other hand, the only costs associated with the company's commercial real estate are interest and depreciation.
These variations may result in higher income taxes for businesses that own their property as opposed to leasing it.
Despite this, there may be ways to reduce the tax burden for businesses that own their properties. With its larger revenues, the operating business might benefit from a leasing deduction if a holding company owns the property and rents it to the operating company. The holding company then offsets lesser revenues with the interest and depreciation deductions. To effectively organize this type of arrangement, you need speak with your accountant and attorney.
7. Liabilities and Extra Charges
Having a commercial property comes with extra responsibilities. You might not want to assume these additional liabilities that come with owning a commercial property, depending on your company's situation:
Zoning: You must be informed of the zoning rules that apply to the space you are renting when you wish to rent a business property. When you own, you must be knowledgeable of any laws that might be relevant to the complete property. Additionally, even prior to the ownership change, you can be accountable for removing any work that was done without a permission.
You'll need title insurance to guard against title and mortgage fraud.
You'll need title insurance to guard against title and mortgage fraud.
Liability protection: Costs could be higher because the entire property needs to be secured.
Additional maintenance fees As the property owner, there can be extra maintenance charges, such mechanical and structural upkeep, that the landlord would handle on your behalf as a tenant of a commercial property.
The decision of whether to buy or lease a commercial property isn't always simple because there are so many different property types available in most places. Making the best decision for your situation will depend on how carefully you consider these 7 variables and how you debate your options with a commercial real estate expert, your accountant, and your lawyer.