One challenge small business owners are faced with when it comes to just starting out, moving to a new location, or expanding is whether to buy or lease commercial real estate. The right answer depends on your business’s unique situation, finances, and long-term goals.
Buying Commercial Real Estate
Purchasing commercial real estate is a long term investment. If you plan on using the space for years to come, buying commercial property might be the best route for your small business. As with everything, there are always pros and cons.
Pros of Buying Commercial Real Estate
When you purchase commercial property you can purchase with as little as ten percent equity. Then each payment you make helps you pay off part of the principal. This, in turn, allows you to build equity in the property. The equity available is calculated as the difference between the fair market value for the property and the loan amount that remains. It will take time to build equity in the property. A Small Business Administration (SBA) loan offers terms up to 25 years, which means that the more time that passes, the more equity is built. If needed, you can borrow against the equity to put into your business for future expansion.
You also have the opportunity to rent out all or a portion of the property when you purchase. Renting out unused space can help with the costs of maintaining the building. Small business owners who choose to purchase are able to reap the tax benefits. Commercial property owners can deduct interest, depreciation, and other expenses that aren’t related to paying back the loan.
Cons of Purchasing Commercial Real Estate
There can be a few cons when it comes to buying commercial real estate. The need for upfront capital is one of the most limiting downsides. Small business owners must have the capital to cover the required down payment, closing costs, and any other due diligence costs that arise. However, there are a variety of options when it comes to financing a purchase.
When you own, the liability rests on your shoulders. You must make sure the building is up to code and all safety regulations are met for both employees and customers. Although, when purchasing, you expect your commercial real estate property to appreciate.
Leasing Commercial Real Estate
For small business owners who are looking for a shorter-term commitment with fewer upfront costs, leasing commercial property is an attractive choice.
Pros of Leasing Commercial Real Estate
Lease terms tend to be shorter than mortgage terms, and most commonly range anywhere from 3-5 years. This is appealing to owners who intend on using the property for a relatively short period of time. There is also less liability when it comes to leasing. It is the responsibility of the landlord to make sure the building remains up to code and meets all safety regulations. All maintenance and upkeep of the property fall on the shoulders of the landlord unless otherwise agreed upon in the lease.
Just as with purchasing, there are tax benefits to leasing. Small business owners are able to deduct lease payments, property insurance, and utilities. The flexibility is a huge upside. Owners aren’t tied down to the property long term and are free to pursue other options when the lease is up.
Cons of Leasing Commercial Real Estate
There are drawbacks to leasing as opposed to buying. Small business owners have less control when it comes to what is and is not permitted on the property. All decisions must be approved by the landlord.
Leasing is not an investment, and therefore you are not able to build and borrow against the equity of the property because you do not own it. In many cases, lease payments are also higher than mortgage payments.
Which Option Is Best For Your Small Business?
Every business is unique. In short, there isn’t one right answer that fits all. For businesses who are looking for a short term solution and lack upfront capital, leasing may be the best option. For small business owners who are looking for a long term investment and have the financial means, purchasing commercial real estate may be the better option. First Home Bank has a knowledgeable and experienced team of lenders to help you reach your goals and determine the best option for your business. Contact us for more information.