Business owners make a lot of decisions. If you own a business, you need to decide where to conduct your operations. You may need to choose whether to buy or lease a space. Whether you need to manufacture goods, run a brick-and-mortar retail location, or just provide office space, you must invest wisely. Each option presents benefits and challenges. We will compare the pros and cons of buying versus leasing when starting a business.
The first thing to remember is the fact that every business is different. You have an image of your successful company in your head. You could make assumptions that will cost you later. Sometimes a friend or competitor sets up their business up one way, but for you, those choices may not make good sense.
Owning a Space for Your Business
Every day millions of customers enter businesses completely unaware if the business owns the property. From their perspective, it makes no difference, if all else remains equal. However, a certain amount of pride comes from owning your own space.
Fixed Costs – Leaders improve their chance of success by keeping a close eye on the numbers. Good decisions, enacted in a timely manner, can make or break a company when external challenges arise. When you own, the expense of your place of business becomes more predictable. If you have the cash to pay for it, then your ongoing expenses should be relatively low.
If you don’t have the cash or choose not to use your liquid funds to pay, SmartAsset points out that a business mortgage is a lot like a residential mortgage. The major difference is that the down payment requirement for commercial real estate is usually higher, typically 35%.
Tax Incentives – When you hear about a large company opening a factory or moving their headquarters to a new city, you often hear about tax reductions or elimination offered by local governing bodies. Communities benefit from new jobs and other revenue, like sales tax. So they often negotiate good deals for business owners.
Additional Income – When you own a space, you have the opportunity to rent a portion of the property to tenants. That can help protect the company through additional cash flow. Plus, the purchase of the property gives the owner equity. They can resell the asset in the future, possibly for face value or maybe even for a sizeable profit, depending on the market.
Less Flexible – Buying property is usually a long-term endeavor. In real estate, they say, “There is a word for property that moves fast… cheap!” If you expect significant growth in the next few years, make sure your property has room to expand or you may find yourself trying to unload a space that is stifling you. Or what if you buy too big and have to cut back in an economic downturn? A few employees in a large empty space doesn’t make an efficient solution.
Up-front Costs – Renovating or building out a property and the ongoing maintenance can cost you. If you are just starting out, that burden might be too much until you build reserves.
Leasing a Space for Your Business
The primary benefit of leasing your own space is flexibility and speed. Leasing gives you the ability to change and adjust your gameplan as you need.
Premium Property or Location – Just like a person who wants to drive a flashy car and can’t afford to pay for one, a lease is a way to get a space in a really cool building almost instantly.
Frees up Working Capital – The term “opportunity cost” means that if you spend money on option A, you can no longer use that money for option B. Using your liquid assets to buy real estate might be a bad idea if things are tight starting out and you have worries about making payroll or increasing raw materials costs.
The Neighbors – I’ve heard a story about a chiropractor who rented his space and the unit next door became a bar. The owner did not enforce anti-smoking rules which caused smoke to spread through his shared HVAC equipment. There was also a problem of trash and occasionally noise that damaged the impression visitors had of his business. If you own, you have control of who is near you. If you lease, you don’t have much control beyond relocating.
No Investment Equity – There is not investment growth benefit in the value of the property. Plus, if the value is increasing, you may face cost increases every time your lease comes up for renewal.
FitsSmallBusiness.com reports that over a long-term period of about fifteen years or more, the cost of leasing a space is higher overall. But consider that business can change a great deal in fifteen years. Keeping cash liquid and having the freedom to adjust, might make the difference.
The main point is that as a business owner, you need to consider the different advantages and disadvantages. A qualified accountant can help you work out the numbers to make a more informed decision. No matter which you choose, realized that neither one is absolutely permanent. The wise decision, however, will help keep the space you choose for your business from becoming a stress or a distraction from your daily operations.