ITRA Global News

Lease vs. Own: Property Priorities for Business Owners
 

January 23, 2018

Many small business owners struggle with the dilemma of deciding whether to buy or lease office space. If you ask business consultants or real estate brokers, you may get conflicting answers.

The key point to remember is this: each small business has subjective, unique situations and concerns, resulting in a different answer for each business owner.

A good place to begin is by examining your company's current business plan and earnings forecast, credit history, and the local real estate market. Every business idea should be carefully researched before making any final decisions. As you search for the right answer, consider these questions:

How is your cash flow?

As a new small business owner, your cash may be limited, and as such, it would be more cost-effective to lease a facility when you begin. For example, imagine that you could lease a building for $4,000 a month, but if you were to purchase that same property, you would need a substantial down payment in addition to the capital required to pay the monthly mortgage costs. Examine your cash flow projections carefully, and then make a fully-informed decision.

How long will you stay in the building?

If you think you will be in that particular building for only a few years, it may be worthwhile to lease rather than buy the building; however, if real estate values in your market increase, then you should carefully consider purchasing.

Do you like the general area?

Many small businesses make the mistake of buying a building only to realize later that they do not like the location because of insufficient parking or a continuous decline in real estate property values. Evaluate such issues before passing the point of no return.

Are you ready for additional responsibilities?

If you decide to purchase a property, you will now be responsible for maintenance, security, remodeling, and other management issues. Sometimes it is more beneficial to let a 3rd party landlord handle these details. Compare and contrast the costs and benefits of purchasing with the added expense of handling the new responsibilities. If owning would not be cost-effective, your decision should be easy.

How much will your business grow?

If your business continues to expand, you may need to hire more employees. Before trying to cram them into the existing office space (like sardines), review your options. You could relocate to a larger location, or use conference rooms as work areas. Another possible option is to allow some employees to telecommute (work from home).

If you are seriously thinking of buying a commercial property for your business, consider the following:

  • Asset appreciation: real property can be a great long-term investment, and the building and surrounding land is an asset that historically appreciates in value over time.
  • Fixed overhead costs: along with payroll, mortgage loan payments can be one of the highest fixed business expenses.
  • Potential to lease surplus space: if the property is too big for your exclusive use, you may be able to lease a portion of it to a 3rd party tenant, and recapture/occupy this extra space later if/when your business is ready to expand. This revenue can help cover some of the mortgage payment cost, or provide cash flow.

 

Article submitted by Michael Coretz / ITRA Global Tucson, Arizona USA

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