As you get closer to opening your own small business, there is one important question you need to answer: should you lease or buy your commercial space?
As with most things, it’s not an easy question. There are pros and cons to each option and making a final decision requires a lot of research, analysis, and planning.
Below are some small business tips that should help you understand what you’re getting into when you buy or lease and help you navigate which decision is best for your business.
Why Buy a Commercial Facility?
Builds Personal Wealth
The main benefit of buying a commercial facility for your small business is that it becomes an asset that you own should you want to build your personal wealth. It builds equity over time as you pay off the mortgage and the value of real estate goes up.
Moreover, you can borrow against that asset in the future or even rent it out for additional income.
Location, Location, Location
Many small business owners buy their commercial facility because of the location. If you find a property that can help increase sales through foot traffic, is close to major transportation routes, is close to key suppliers, or helps attract and retain employees, you may want to consider purchasing it.
Tired of Dealing with a Landlord
Buying a commercial space means you can do with the space what you want. It also means not having to deal with restrictions placed on you by landlords and possible rent increases.
Free Up Working Capital
A well-financed purchase can free up working capital by reducing monthly payments, thereby freeing up money to build your small business.
Factors to Consider When Buying
Consider the Long-Term Costs
A lease might provide your small business with additional cash flow in the early years, but over the long term, purchasing a property is usually cheaper. That’s because a landlord, who needs to pay off all the costs associated with purchasing and maintaining the property, is looking to make money too.
To avoid paying the landlords profit premium, consider buying, not leasing.
Rising Land Values
If you want to operate your small business in an area where you think land values are going to continue to increase, it would be better to buy than lease. Especially if you find a commercial space in an area where land values are just starting to rise.
Buying a commercial facility can provide you with small business tax savings. You can claim yearly depreciation deductions. If you financed your purchase, the interest portion of your mortgage payments is deductible.
Depending on several other factors you may be able to lower your tax bill more so than with a lease.
Why Lease a Commercial Facility?
Leasing commercial space can provide small business owners with flexibility. Flexibility is important for fast-growing businesses and cyclical companies that find it difficult to forecast the amount of space they will need.
Location, Location, Location
Leasing provides leverage because it can allow you to get a premium location with easy monthly payments instead of needing to come up with the funds to buy in the same location.
Leasing is not just a business strategy used by small business owners. Major brands like IKEA, Home Depot, and Burger King lease space instead of buying. All of those brands have more than enough money to buy, but leasing provides them with the leverage to operate in better locations.
Your Small Business Is Relatively New
If you’re just starting your business, you may not have enough capital or fiscal certainty to buy. Leasing is a much better option and can help your business adjust to varying business demands.
Your Small Business Is Expanding or Downsizing
Where are you in your business cycle? Leasing makes a lot of sense if your small business is growing-fast or downsizing. Leasing will allow you to move if you need more or less space.
You’d Rather Invest in Your Small Business
Leasing is a great option if you’d rather invest capital in your small business than real estate.
Factors to Consider When Leasing
Your Current Cash Flow Needs
Leasing a commercial facility, especially in the early years, may provide you with more cash flow than purchasing a property would. Up-front costs associated with leasing are typically lower than the up-front costs of buying a property.
With a lease, your up-front costs will be limited to a security deposit and first rent payment. If you purchase, you have the purchase price (or at the very least a down payment), and closing costs, etc.
Most leases put the duty of maintaining the property on the shoulders of the landlord. This can include roof repairs, maintenance of heating and cooling, electrical, and plumbing. Check the lease though as some commercial landlords will pass these expenses to the tenants.
In most cases, the landlord are responsible for shovelling the walkways and parking lots, cleaning windows, and common hallways. If you own a property, that’s your responsibility.
Restrictions, Improvements, and Signage
The landlord is probably in charge of maintenance and repairs, but what about renovations and improvements? Be sure to find out about any restrictions that could limit your ability to expand the space.
When the lease ends, do you have to return it in the same condition you got it? Do you get to keep any added equipment and fixtures, or do they become the property of the owner?
What about signage? Can you add any sign you want or is it regulated? Signage is important since it lets customers know where you are.
Declining Land Values
It’s quite possible that you could find a commercial facility that fits all your needs, but what if real estate values in the area are flat or even declining in value. If this is the case, leasing makes more sense. It’s better to pay rent on a property you’re not tied to than a mortgage where property values are falling.
FBC, Providing Canadian Entrepreneurs with Business Planning
Buying or leasing a commercial property is an important step for small business owners. Whether your company is just starting out, mature, expanding in size, or downsizing, the tax professionals at FBC can help you decide whether it makes sense to buy or lease.
Since 1952, the tax experts at FBC have worked exclusively with small business owners, farm operators, entrepreneurs, and independent contractors. Over the years, we have helped tens of thousands of customers from coast-to-coast, with customized tax services, business planning, succession planning, financial and estate planning, bookkeeping, and tax preparation.
For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.