As any entrepreneur can tell you, owning a small business isn’t easy. You need to focus on providing quality products and great service while driving customers to your business. But a great deal of time is also spent on keeping the day-to-day operations running smoothly.
One of the most important operational decisions you will make is whether you should buy or lease your office space. You’ve probably found or are looking for a great location for your business that is accessible, offers ample parking, and provides enough square footage for everything that you need. But could you be more profitable if you owned the building instead of paying that monthly lease?
Surprisingly, the answer may be yes. There are significant benefits for small-to-mid-sized businesses that choose to buy their building.
Even in this rising rate environment, one of the best reasons to buy is to lock in today’s historically-low commercial mortgage rates. This provides a better way to budget monthly expenses in the long-term as your payment won’t fluctuate like it would with rent increases. With current commercial mortgage rates still at historic lows and commercial real estate in many states very affordable, now is a great time to lock in that rate. Taking advantage of this for as long as 15 years can reduce or completely eliminate the need to refinance throughout the life of the loan.
Buying your building also allows you to build equity over time. That equity can be used as collateral if you expand your business, and can even be used to fund your retirement or that of any of your partners. In fact, part of your retirement exit strategy could be to sell your interest in the business, but continue to own the property.
Another great advantage is leasing part of your space to tenants. Owning your building allows you to rent out extra space, producing another source of income to offset the cost of the property. Leasing can also benefit your business directly if you rent to a complementary business that can potentially refer customers to you and help your business grow. Ownership allows you to readily take on more space or more tenants should your business expand or contract.
Finally, tax deductions are key. Small businesses which own their buildings may deduct mortgage interest expenses on their taxes and depreciate the space. Unlike a lease, however, you cannot deduct the entire monthly payment, nor can you write off the entire cost of the building at once.
As an example, if your business now pays $4,000 a month in rent, that equates to the monthly principal and interest payment on a $675,000 commercial mortgage based on today’s rates and a 25-year amortization schedule. With a typical down payment of 20%, this puts properties in the $825,000 – $850,000 range well within reach.
While buying may sound like a no-brainer, it’s not without its drawbacks. Perhaps most important is the upfront costs. Buying a building initially will cost more than leasing, since your business will incur appraisal, closing and maintenance expenses, plus a large down payment and possible property improvement costs.
Owning your building also means you will have less flexibility when it comes to space requirements. If your business grows faster than anticipated, you may actually outgrow your own building, forcing you to sell the property. Similarly, if you are hit with unexpected costs – loss of a number of customers or the need to purchase new equipment – you may not have the financial flexibility to address these issues.
And just like buying, there are some benefits to leasing that should weigh into your considerations. Leasing, for example, allows your business to locate in a more prestigious property, while avoiding the headaches which inevitably come with property ownership. Leasing also frees up more working capital, providing more flexibility to respond to new opportunities.
Bottom line: there’s no one size fits all approach when it comes to deciding whether to buy or lease. Financial, tax, and personal issues all come into play. Before acting, make sure you consult with the experts who know you, your business, and your industry. Their counsel will be essential in making the decision that’s right for you.
