How to Decide to Rent or Buy Commercial Property for Your Small Business
You chose to be a small business owner for a myriad of reasons – to call your own shots, to create your own ideal work environment, to fulfill your own dreams. If you’re now contemplating whether to rent or buy commercial property, that likely means you’ve aced it: you’re a savvy leader whose business is growing.
The downside is that you may have to move to accommodate your growth.
A move may be imminent if one of these scenarios describes you:
- You run a home business that now needs its own space
- You’re bursting at the seams of your current commercial space
- You wonder whether the fastest growth will happen with a second location
Whatever the reason for a pending move, there are multiple factors every small business owner should consider before deciding to rent or buy commercial property including:
- Location. If your success depends upon customers finding you at a physical location, the availability of the right property will dictate your decision more than any other variable. Owning might be your preference, but if the ideal property for your business is available as a rental only, then renting that property should win out every time.
- Future growth plans. If you know you’ll be adding staff or increasing your on-hand inventory, but don’t know to what degree, you may want more flexibility, so leasing might be a better option for you.
- How long do you plan to stay in the space? The average break-even point is seven years, that point in time when it typically becomes more cost-effective to buy vs. lease.
- Flexibility vs. stability. Which is more important to you? Lease terms can be as short as three years and are much easier to adjust. However, a mortgage might give you more of a sense of permanence and typically comes with a fixed monthly payment, better for planning long-term.
- Fixed overhead. Do you need specialty fixtures or heavy equipment to produce or deliver your product? Drastic renovations to an existing property can increase your costs and the amount of time to recoup your expenses. That may make future moves less practical.
- Property maintenance. Do you have the time, means and interest in being a landlord and property manager?
- Direct and indirect costs. In addition to the cost of the building or the monthly lease, don’t forget about taxes, insurance, utilities and maintenance when budgeting for your new home. Some of these costs might be built into a lease, but there could also be additional tax incentives for owning your own space.
- Cash on hand: Can you afford a hefty down payment?
As you think about each of these factors and what your answer will mean in terms of your available resources – both time and financial, it’s possible you’ll want or need to access a variety of small business banking resources like a commercial real estate loan to get you settled into the best new space.
The benefits of leasing small business commercial real estate
Your initial instinct might be that renting is like pouring money into a bottomless pit. But, leasing your place of work is not at all like leasing a home. In addition to your mortgage, property taxes and ongoing maintenance, you’ll be responsible for security, property insurance, parking and more.
There are many benefits to leasing your business home, such as:
- Smaller upfront capital expenditure
- Less risk
- Reduced liability
- Less stress because someone else is the landlord
- More flexibility to adapt for future growth or unexpected changes in your business model
Most commercial real estate developers will also expect you to negotiate the terms of the lease, so don’t be afraid to ask for free rent in the initial month(s), renovations to the space, shared responsibility for extras (like cleaning, security, maintenance or after-hours service support) and a clear understanding of the rental rate increases. The greater the glut of properties available in your area, the greater bargaining leverage you’ll have.
To get you started, run the numbers here, with this handy rent or buy commercial property calculator.
The benefits of buying small business commercial real estate
There are many advantages to investing in commercial real estate, beyond the break-even point (the seven-year mark we mentioned earlier). One of the biggest and most obvious advantages is the equity you will build over time. As a small business owner, this property could fund your retirement, supplement your bottom line with additional rental income or serve as collateral for future growth.
Other benefits to buying include:
- More control over your space. While much can be negotiated when leasing a property, the reality is that you are still not the landlord. This means you’ll ultimately have to seek permission for substantial changes to the property or to sublet your space if the need or desire arises. You’ll also need to rely on that landlord anytime there is a maintenance or security issue.
- Tax benefits from interest, depreciation and non-mortgage expenses
- Potential capital gains if the property appreciates
- A fixed mortgage for budget planning
Here’s a comparison of the costs and more to help you determine whether renting or buying is right for you. Greater Alliance Federal Credit Union can also help you with an unbiased comparison if you have your eye on one or more properties.
How to get started on the path toward small business commercial real estate
Now that you’ve analyzed the good, bad and ugly (or not-so-ugly) of renting or buying your commercial property, it’s time to act. While cost is always a top priority for small business owners, and prices in key metropolitan areas are heating up, it shouldn’t be the only one.
Here are additional ways to take the next step toward your new location:
- Talk to your accountant. He or she can help you determine whether you should rent or buy commercial property by analyzing the move from a purely financial perspective. Your accountant will:
- Analyze the impact on your annual operating budget
- Review your cash flow and working capital
- Investigate tax implications
- Find the right real estate broker to help you navigate available properties and the myriad of zoning laws, restrictions and potential negotiating points.
- Find the right commercial real estate loan. Consider the pros and cons of a credit union vs. a bank before deciding which financial institution is right for you.
While we obviously think Greater Alliance Federal Credit Union is the smart choice for your commercial real estate loans, we might not be the best fit for you, depending upon where you’re located or how much you need to borrow.
Moving tips for the small business owner
There’s significant stress in moving from one location to the next. Remember the last time you moved to a new home? That experience is magnified when it’s a business move.
Here’s some advice from other business owners to reduce that stress on you and your employees:
- Create a move budget. Will you need to hire a moving company? Will your business be offline during the move? What will it cost to transfer your utilities, create new business cards and notify your customers of the move? Don’t be caught off-guard by the direct and indirect costs that come with making the move.
- Communicate early and often – with customers, vendors and employees.
- Update business profiles and listings. Changing your address has become much more than a change in location in the local phone book. Make a plan to update your website and social media platforms, including the various online browser listings and map locations and LinkedIn® and Facebook®. Also note the change of address in your email signature line, especially for existing customers who might never check those public listings.
- Notify the media. Send out a simple press release describing the new move and how it will help customers. It’s great way to educate your community about the move and to bring your business top-of-mind for potential new customers.
- Plan for delays. If your new location is a new construction or requires a significant remodel, you can bet there will be unexpected delays. Have a back-up plan in case the initial move date falls through.
- Move on the weekend for the least amount of business disruption.
- Communicate again. There’s nothing worse than not finding you! Even with the best proactive communication plans, customers and vendors get inundated with information. Send notices when the move is complete, and remind everyone of your new address, phone (if applicable) and hours.
Getting the right small business banking support for your new location
Whether you rent or buy commercial property, we encourage you to contact Greater Alliance or another trusted financial institution to learn more about a commercial real estate loan or line of credit. Get pre-approved so you know how much property you can afford to make your shopping experience pain-free! Click here to learn more about our business loans or call to talk to a member of our business team today at 888-554-2328 x290. We’re your go-to experts for all your small business banking needs.