As you develop your business, you need to make countless choices. What will your logo look like? How much will you pay employees? Do you need a website?
While all of these choices are important, the real estate decisions you have to make for your brick-and-mortar location are some of the biggest and most significant on the table. You may sign lease agreements that last multiple years or take on a multi-decade mortgage.
You don’t have to feel overwhelmed by your real estate options. If you weigh the pros and cons of each choice and evaluate your finances objectively, you can make the best choice for you. Here is what you need to know about renting vs. buying a commercial space.
Pros of Leasing
- There is no down payment. While you may need to pay a renter’s fee and will likely be responsible for at least the first month’s rent up front during the signing, you don’t need a large amount of seed money to lease a space. Most down payments for commercial properties are 10–40%, which may require you to get a startup loan to cover.
- You don’t have to worry about repairs or maintenance. If there is an issue with the building or the property, you don’t have to cover the costs to address it. This can keep your maintenance costs low as you run your business.
- You can move locations easier. When your lease ends, you can easily move to a different location where your business will be more profitable or save money. If you own, you need to go through the process of selling your place and then finding another space to buy or lease.
- You can use your startup funding for other costs. Instead of tying up your funds in property expenses and down payments, you can focus on marketing your new business and investing in other infrastructure to get your company off the ground.
- There is less risk if you close. If you need to shutter your business suddenly or want to retire, you can wait for your lease to end or break it with the fees set in the agreement. You don’t have to worry about selling the property.
Cons of Leasing
- You are dependent on the landlord’s rental rates. While you may be able to renegotiate your rent on occasion, your landlord sets the rent amount and expects you to pay it. This fee is different from having a mortgage that you may be able to refinance or adjust every few years.
- Your landlord may reject your lease renewal. Some business owners rent from the same location for years, but other entrepreneurs have stories of landlords who terminated their leases unexpectedly or decided against letting them renew. In this case, you may only have 30–90 days to vacate the property, leaving you in the lurch to find a new location and get it operational.
- You are limited in the changes you can make. Along with following city codes and zoning restrictions, you may also need to follow rules set by your landlord. For example, they may limit the amount of construction you can do in order to preserve their space for future tenants.
Pros of Buying
- You are investing in yourself. When you buy a commercial space, you are creating equity. Instead of writing your landlord a check that you will never get back, you are investing in something you own. When you decide to sell—either to close your doors or move locations—you will get your investment back and will likely turn a profit if the real estate market improved.
- You can eventually rent out your space. If you decide to close your doors to retire or to end your business venture, you can become a landlord and rent the space out. This investment could be financially beneficial to you long after you leave the workforce.
- Your mortgage likely won’t change. If you have a fixed mortgage, you will pay the same or a similar amount with each passing year. You won’t have to worry about a landlord raising prices and reducing your overall profits.
- You can make whatever changes you want. As long as you follow the city code guidelines and pull the right permits, you can make changes to the structure, color, design, and architecture of the business. The space is truly yours to bring your vision to life.
- Tax breaks can offset additional expenses. There are several tax breaks for commercial property owners. These breaks include deductions for the interest you pay, depreciation, and capital gains. This tax break could make your mortgage even more affordable if these fees are negated each year during tax season.
Cons of Buying
- Moving is harder. If you outgrow your space or want to downsize, you can’t easily close your doors and change locations. You will either need to rent out your space (which can create added stress if you are still operating another full-time business) or sell it before you can buy another. Buying is really the best option if you have no plans to move until you close your doors.
- You are responsible for any problems. While your mortgage rate might be significantly lower than the rent you would have paid, there are other costs that can wash those savings away. You are responsible for all repairs and maintenance, from updating the plumbing so the toilets don’t clog to tenting the business for termites. Make sure you factor in these costs before you decide to buy a space.
- The up-front cost is significant. If you don’t have investment funding or a small business loan, you may have a hard time buying a space. Additionally, you may end up paying off both your mortgage and your loan at the same time.
The decision between buying and renting commercial space will depend on the nature of your business and your financial flexibility. If you plan to create a legacy that stays open long after you retire, then you may want to buy a property. However, if you just need a brick-and-mortar space for the next few years, renting may be the better choice for you. Either way, do your research, crunch the numbers, and make the best choice possible based on the information you have.