Is now the right time for buying a building? Or is it better to renew your lease?
Today we’re going to help you break that down. There are pros and cons to owning commercial real estate, and every situation is different. But, hopefully, this article will help bring you clarity as you look toward finding the perfect space for your business.
Buying vs. Leasing a Building
Let’s start out with a simple argument. Your lease will never go away. But, if you choose to buy, you’ll likely own the building outright at some point. This will help to increase your profitability and thus help your own business grow further. Here are the pros and cons of both:
Buying A Commercial Building
Before buying a commercial real estate property, one of the biggest things to consider is how long you plan to stay in that building. If you’re looking to stay in the area and roughly the same size building for upwards of 10 years or more, buying may be more beneficial than leasing.
Work with your real estate agent, attorney, and commercial broker to obtain the best possible financing package for your building purchase. The 504 loan offered by the Small Business Administration helps small businesses buy real estate, equipment, or machinery at below-market rates.
Equity – First off, when you purchase a commercial property, you will build equity in it just like you would a house for your family. The equity you build can be used to help fund purchases in the future and make your business appear more stable.
Asset Value Appreciation – Over time, your building will likely become more valuable. There are a few different reasons for this. #1 it’s located in a desirable location, #2 building costs go up over time, #3 the time it takes to build makes owning a building quickly more valuable.
Potential Rental Income – If the building that your company buys is big enough to house more than just your own company, you’ll rent out the extra space to other businesses in the area. This can serve as a great way to bring in passive income and make your company more profitable.
Tax Breaks – Property taxes can be overwhelming. Loans are expensive, and so are interest payments. Thankfully your company can receive some pretty legitimate tax breaks on many of these interest payments making tax season a little bit less painful for your business.
Control Over Property – Lastly, you’ll have total control over your business and the future of the commercial space. If you want to remodel it or change the landscaping of the building, you’ll have the freedom to do so without any restrictions that would have been accompanied by leasing a property.
Upfront Down Payment – You’ll need an upfront down payment for any purchase. Depending on the purchase price, this can come as a big hit on your business’s balance sheet if you’re not ready for it.
Qualifying for Financing – Qualifying for financing can be difficult. Whether because of a lack of profits or because your company is already stretched thin. You’ll need to work hard to ensure that everything is in order.
Prepayment Loan Penalties – Some loans may, unfortunately, have penalties for early repayment, making paying off the loan much less attractive. Shopping around for the best loan will help you steer clear of this problem.
Liability Insurance Required – As a business and landowner, your company will be required to carry liability insurance. This insurance will protect your business in the instance that anything happens on your property.
Potential Loss of Liquidity and Capital – When your company purchases a building, a large portion of its assets will be tied to that building for some time. This can make liquidity and capital more difficult to access for a few years.
Leasing a Building
When businesses are first starting out, leasing is the perfect option because it gives the business a place to office without the need for any large capital investments or a loan. This is the ideal solution for a small business owner and those that are trying to keep the balance sheet as lean as possible.
Access to More Liquidity – When you lease, your business won’t need to come up with a large down payment and instead can use those funds in a more liquid and useful way. This will help your company manage the balance sheet without risking too much money in a downpayment for a building.
Fixed Monthly Cost – Buying commercial real estate can come with unexpected costs. When you lease a building, you’ll have a monthly fixed rate that won’t fluctuate during your lease contract.
Tax Breaks for Expenses – There are tax breaks for businesses that lease. You’ll be able to attribute a certain portion of your business’s income to leasing. That income will be tax-free or at a reduced tax rate.
Flexibility to Leave Property – After your lease is up, you’ll have the flexibility to either renew the lease or discontinue it together and move on to a different property.
No Equity or Benefits of Appreciation – The biggest downside to leasing is that you’ll never build equity in a building and thus won’t see a tangible return on the investment of your funds into leasing.
Unable to Rent Out Extra Space – Any extra space that you have in the building will be owned by the property company that manages the building. That extra is theirs to rent out and not yours making the chance for passive income unlikely.
High Rent Expense – Rent is often more expensive than purchasing a building because of the costs surrounding the upkeep of that building. Unfortunately, there’s just no way around spending quite a bit of money on your commercial real estate lease.
No Control Over Space – Most property companies will allow you to make some changes to the office buildings and its layout, but no significant changes will be able to be made. Some companies won’t see a problem with this as the commercial property might be exactly what they’re looking for, but this may be very difficult for others.
If you’re in need of a commercial building or would like to begin buying commercial real estate, we’d love to come alongside you. APX Construction Group is a premier commercial real estate development company. Be sure to also check out our blog for more tips on commercial building and real estate for all types of commercial applications.
Should a business own its own building?
It depends on the business and the available options. Owning a building can provide more control over the space and potential long-term cost savings, but it also carries risks such as a lack of flexibility and a potential need for major repairs or renovations.
What type of commercial property is most profitable?
Properties that can generate the greatest financial return are usually those with the most tenants. These types of commercial real estate may include multifamily projects, student housing, offices, self-storage facilities, sporting complexes, and mixed-use buildings.
Is it cheaper to buy a building or build one?
It depends on the project. Building from scratch is usually more expensive than buying an existing structure, but if the existing structure requires extensive updates it could be more cost-effective to build from the ground up.