More and more small business owners are considering buying rather than leasing commercial property.
It is easy to understand why it may be an opportune time to lock in a fixed monthly payment when you take into account the commercial interest rates that are currently at historic lows. And with recent accounting changes making leases a defined liability on the balance sheet, what is the difference between leasing a property and buying it outright using debt financing?
But the choice to buy rather than lease commercial property is not black or white. There are many important factors to consider that may sway you towards the decision to lease real estate for your business rather than buy.
Here are a few reasons why renting office space may be a better choice than buying.
Buying Property Locks in Your Payments For a Specific Amount of Space
If you are anticipating continued growth of your business it may not make sense to buy a piece of commercial property. Let’s say you decide to buy a 10,000 square foot warehouse for your business. While at the time of purchase the 10,000 square feet was the right amount of space, what happens if your business rapidly increases in size?
You will likely have to lease or buy additional warehouses, adding layers of inefficiency and complexity that will be a distraction. You may even have to sell the property you bought and find a larger space that matches the increased scale of your business.
Leasing space is more flexible as you can enter new leases at increasingly larger locations as your business continues to grow over the years.
Let’s say the opposite issue springs up- the size of your business contracts and you find yourself with an owned property that is too big for the current size of your operations. You could lease out unused space to third parties, but this will add additional distractions and headaches. It may also be difficult to divide an underutilized space and the cost/distraction of doing so may come at the cost of your company.
This again is where leasing may be a more attractive option. Even if you are in a multi-year lease, within a short to medium time frame, you can reduce your occupancy costs by signing a new lease at a smaller location.
Full Service Leases May Be Cheaper Than Owning a Property
While landlords have been known to increase rents and common area maintenance expenses at rates that exceed their true operating costs, you may be getting a better deal with a third-party landlord as opposed to buying a property and incurring the expenses yourself.
When comparing the cost of buying a property to the cost of leasing, it is important to include the operating expenses that come with owning a property.
There are routine maintenance expenses, janitorial service expenses, trash removal service expenses, utility costs, and many more services that your landlord may be including in the full-service rental rate.
The true cost of commercial property ownership, on a per square-foot basis, may exceed prevailing market rates for full service leases.
There Are Opportunity Costs to Buying Rather Than Leasing Commercial Property
While there are programs available for small businesses to buy real estate with a minimal down payment, you will still need to put up equity if you decide to purchase a piece of commercial property.
Investing this cash into a property rather than into your business has an opportunity cost. If your business is generating a return on equity that exceeds a realistic return you could generate on a commercial property investment, it may make more sense to rent rather than buy.
There is also a time opportunity cost when buying over leasing commercial property. Owning your business real estate requires an additional time commitment. This time commitment extends beyond the purchasing stage and may come at the expense of effectively running your business at its maximum potential.
Leasing Gives You More Location Options Over Buying
If your business needs space in a central business district, it may be possible that you will not be able to find a property to purchase. Retail space in downtown areas is typically a portion of a larger property. While there are occasionally retail condos at street level, unless you want to buy an entire multi-story building, you may not find a restaurant or retail space available for purchase.
Leasing space gives you more options for a location that fits the needs of your business. Instead of buying a building in an out of the way location, you can choose to lease space that is centrally located allowing you to maximize the potential of your business.
It May Be the Time to Buy, But Renting Could Still be the Better Option
The choice to rent or buy real estate for your small business is not black or white. There are many factors to weigh and consider.
While you can build up equity via property ownership, the opportunity cost of making a down payment may come at the expense of your business profits.
While buying a property will lock in a set monthly mortgage amount, leasing gives you the flexibility to adjust your occupancy costs to a level that fits the ever-changing size of your business.
Owning commercial space will allow you greater control over property management expenses, but some full-service leases may be cheaper than the true cost of commercial property ownership.
The time commitment of property management could be an unneeded distraction for your business. Having to deal with property maintenance should be the last thing on your mind if you are trying to take a small business to the next level.
If your business requires foot traffic to generate sales buying a large downtown property may not make business sense, but leasing a small street-level space in a larger building may better suit the needs of your business.
If you are running a growth-oriented small business, renting space rather than buying it may be your best option.