To buy or rent – a common question among small-business owners and one with major implications for the bottom line.
Let’s explore some of the common considerations for a business owner when making this important decision.
If you are a new-business owner considering whether to buy or rent space, you might focus on the short term. Renting a business property carries the attractive prospect of initial cost savings – the original cost to find space is typically less for leasing than for buying.
New-business owners’ inclination to rent is a natural and understandable trend. Put simply, it provides flexibility by limiting the risk of a long-term investment in real estate while providing options for growth and expansion.
Despite this notion, it’s still worthy to consider the implications of buying or renting on your business’ future.
Whereas renting provides the benefit of short-term savings, buying offers small-business owners long-term savings. Though buying has a higher initial cost, ultimately those who buy pay less in comparison to those who lease.
Property owners also reap the potential benefit of appreciation in the value of their asset.
Thoughts to consider when deciding whether to buy or rent for your business:
<LONG-TERM AND SHORT-TERM COSTS
Renting may produce better results in terms of short-term costs, which can be practical for new-business owners finding their footing in the marketplace.
When renting, initial expenses generally are limited to security deposit and the first month’s rent. If you’re in position to prioritize current cash flow, renting is practical and far simpler than scraping together the lump-sum purchase price or down payment with a mortgage.
If fortunate enough to consider the long haul, buying tends to ultimately be a stronger investment because it eliminates the necessity of a landlord – factoring out maintenance and utility costs.
Another aspect under this umbrella is potential value appreciation. Buying a property in an area where land values are expected to increase is a potential benefit of appreciation if you ever decide to sell. This is particularly beneficial if you are able to spot the trend before prices increase.
<CONTROL OF THE PROPERTY
If you wish to modify your business’ property in any sense – for example, it requires significant additions or renovations – buying provides unrestricted liberty to do so.
If you rent, making changes such as these requires your landlord’s permission.
Conversely, if renovating isn’t a priority and you do not want the responsibility of making capital improvements, renting may be best.
Every property differs in terms of capital needs, but improvements not traditionally included in common-area maintenance costs might include a new roof, exterior and heating/electrical systems.
<POTENTIAL TAX SAVINGS
Distinct from renting, the money used to buy your business’ property is deductible. Put simply, you can recover your cash outlay gradually through yearly deductions.
For example, if you finance the purchase of your property, you would be eligible for deductions on interest paid.
Also, consider the potential for savings simply because of details such as years in operation and measures of your business’ profitability. If you choose the purchase route, these factors potentially can cut your tax bill.
The decision to buy or rent real estate for your business may seem daunting – especially when viewed through the lens of cost-effectiveness. Though differences in cost are a vital point in the grand scheme of your decision, don’t let them rule your decision.
Whether you own a well-established community business or a new, budding venture, arming yourself with the specifics of commercial property ownership will lead to decisions that improve your bottom line.
If you are on the fence about buying property, now might be the time to jump if you are interest-rate conscience. It is expected that the Fed will increase the prime rate two or three more times this year. Already the rate increased from 4.25 to 4.5 percent during the first quarter.
It will be prudent to keep an eye on the Fed this year, as that percentage can make a significant difference in monthly payments.
If you know you will buy, it may be better to move sooner rather than later if it works in your budget.
If you are working through the decision of renting or buying, take time to meet and review with a number of qualified commercial lenders to find the best fit.
The right lender will be a trusted financial partner to your business, so you should feel secure in the relationship and confident in its experience and knowledge.
Based in Bethlehem Township, Jane Amato is vice president, commercial lending at Peoples Security Bank & Trust. She can be reached at 610-317-4694 or firstname.lastname@example.org.