Should Your Business Buy or Rent Space?
Many businesses rent their office or shop space and have never even considered the option of buying a building or a work suite. For many, the capital is not available, at least not at first, and so it is not an option. However, if you have been in business a few years and have a strong cash flow or already have the capital, there are some strong benefits for buying real estate. Let’s go over a few things here.
The advantages of buying
The first advantage of buying your property is that it gives you complete control. Landlords own the building so they can renew your lease or choose not to. They can raise rents when the lease is up and you have no other option than to pay; provided you wish to stay in that space. On the other hand, when a property is yours, you can choose exactly what happens in the building. It also allows you to decide if and for how long you will stay in that space. You are not tied to any fixed-term lease contract should the area change or if you decide its time for your business to move on.
It’s also worth pointing out that buying a property will be functionally cheaper, especially in the long-term. Just as with residential properties, paying rent can be seen as wasting money. After all, the benefit is really going to the landlord as you are paying down their mortgage for them; building equity for them and not you. When you own your own property, it is also quite likely your payments will be lower than the price you would pay to rent.
Remember that when you buy a property it becomes a business asset too – It may give you the ability to sub lease a portion of the building to off set your monthly mortgage, tax and insurance payments. Should you decide to relocate, you might lease out the entire property and keep it as an investment or sell it, hopefully at an appreciated value. Buying a commercial or industrial space is perfect if your business is a long-term acquisition. But that doesn’t mean that they are not a challenge.
The challenges of buying
The largest disadvantage of buying property is usually that it requires a substantial initial capital investment. You need to consider whether or not your business can afford this outlay. Tying up a lot of capital to purchase a property may be a smart investment but it might also leave your business without financial flexibility – just when you might need it most.
Buying real estate can also be legally complicated. If you do decide to purchase, you may want to consider getting legal advice before you buy anything or even start looking. One thing you’ll need to think about is who is going to buy the premises; you or the business entity and so on. A lawyer can definitely help you make those decisions.
Another issue is that you have to take more responsibility. Buying real estate is a more permanent deal and places the onus on you to deal with issues like building security, roof and plumbing maintenance and insurance. That means that instead of being able to pass problems on to a landlord, you will now be committed to any ongoing costs associated with the building. Once again this can tie up capital so you need to be sure you are putting aside reserves to deal with any unforeseen expenses that will surely arise.
Would renting be better?
If any or all of that scares you, renting is certainly a popular option for many businesses due to the flexibility it can provide. While renting might be comparably more expensive in terms of monthly payments, you won’t need the huge capital investment while you are starting up. Also, when renting you can choose to relocate with much more ease and up or down size without the added hassle to renting out or selling your space.
Selling can be difficult and the commercial property market can be temperamental. If your business is young and you want to stay more flexible as you are planning for growth and so on, buying might not be an ideas solution for your growing growing business. If, however, your business is settled and it is likely you will remain in the same space for a number of years, buying could be a smarter option. It simply depends on the specific circumstances of your company and of course your cash on hand.
The legal issues
If you consider how complicated it can be to buy residential property, it can be even more challenging with commercial transactions. After deciding the entity that will own the property, you also need to plan for worst case scenarios. Your lawyer will help you decide if it makes more sense for you to own the property personally or in the name of the business. We all go into business hoping for blue skies and rainbows. However, times can get tough and business can struggle and you will want to make sure your personal assets are protected.
It is most definitely imperative you seek legal advice for all of these reasons – and probably more. A good business lawyer can provide you with the guidance you need to make the choices to protect your future.
Things you need to consider
Before you commit to renting or buying a commercial property it’s worth giving some thought to a few key issues.
First, do you have enough capital to invest? If your plan is to purchase real estate, you will need capital upfront. Without it, you simply don’t have the option to buy -at least not right now.
Second, are you comfortable taking on the responsibilities of being your own landlord? If you have been a renter, you might be used to the idea of having a landlord take care of maintenance and other issues. If you’re going to own, you will need to be ready for the added responsibilities that entails.
Finally, where do you plan to be with your business in one year’s time or 10? If your business is poised for growth and it likely you will be taking on more staff, inventory and space, you may want to hold off on buying a building. However, if your business is a bit more settled and you feel you know the space and requirements you have now will be adequate in the long run, it might be a good time to buy.