When it comes to choosing the right place for your business, a top consideration is location. The right spot can support the success of your company. Once you decide where, your next step is to determine if you should buy or lease. Owning and renting each have pros and cons, and there isn't one correct answer. Take time to examine each option so you can make the right choice for you and your business.
Buying a space
You probably plan to run your business for a long time, and buying commercial real estate gives you — and your business — a feeling of permanence.
Control. As the property owner, you can make changes to the structure without requiring approval from the landlord. While you'll have to adhere to zoning requirements, you can tear down walls, install large equipment, and make upgrades whenever you wish.
Fixed overhead. Unless you choose an adjustable rate loan, your monthly mortgage payment will remain the same for the term of the loan. That means you don't need to worry about a rent increase.
Equity. Instead of sending rent payments to a landlord, your monthly loan payments build equity. Depending on your location, your property may also increase in value over time.
Lower tax benefits. While renters can deduct their monthly lease payment as a business expense on their taxes, property owners can only deduct the interest portion of their monthly mortgage payment, not the principle portion, according to the IRS.1,2
Upfront costs. Buying commercial real estate costs business owners more up front. You'll need to come up with a down payment as well as closing costs, which can tie up cash that could be used for other business investments.
Repairs and upgrades. When you own a property, you'll need to have a maintenance and repair budget, in addition to your fixed monthly ownership expenses, such as mortgage, property taxes, and insurance on the building.
Tip: Owning a commercial property provides you the highest level of control, while renting provides the most flexibility.
Renting a space
Renting business space provides flexibility without a long-term commitment — a desirable situation for startups or new business owners.
Liquidity. Renting demands much less money upfront. You maintain control of your ready cash and can make investments elsewhere in your business.
Tax benefits. Unlike with buying real estate, where only the interest portion of your monthly mortgage payment is tax deductible, 100% of your monthly lease payment can be deducted from your business taxes.2
Flexibility. Commercial leases are typically three to 10 years in length. If you outgrow your space, it's much easier to find another spot at the end of your lease. If you own the property, your choices are to sell or expand, which can be inconvenient.
Lack of control. Since you don't own the space, you have to get approval to make any changes. Your rent payment can also be increased at the end of your lease. If you can't afford a higher rate, you'll have to find — and move to — a new location.
Higher monthly fees. In some areas, rent is often higher than a mortgage payment. Depending on your agreement, you may also be responsible for monthly property taxes, insurance, and utilities.
Lack of equity. If you're in an area where property values are increasing, renting doesn't give you any of the asset appreciation benefits that owning does. In addition, if you make any improvements, such as remodeling the space, you won't realize any gains if your work increases the value of the property.
Make the right decision
Analyze your business goals, financial situation, and market trends to decide which option offers the most important advantages. Remember, there isn't a one-size-fits-all answer that works for every business.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Internal Revenue Service, "Publication 535, Business Expenses," (2018), https://www.irs.gov/publications/p535#en_US_2017_publink1000208682, accessed July 24, 2019.
Consult with your tax advisor to determine any impacts to your own financial situation.
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