Whether your business is expanding or just beginning operation, the decision of whether to purchase property or lease it is one of the more crucial decisions you will eventually have to make. In order for you to make an informed decision, you must weigh certain factors that apply to your business model and the direction you see your business moving in.
Long-term space requirements might seem like a distant concept to someone just starting out, but making the right moves early on in the process can reap huge rewards later if you are able to foresee where your business might be several years down the road. Understanding the advantages and disadvantages of leasing versus buying property in your own particular situation can go a long way toward helping to decide which is right for you.
Entering into a lease agreement does not require the same level of credit history that purchasing a large property would require, nor is there the need for the large down payment associated with acquiring a mortgage on a property. Another advantage to leasing is that if you have no way of knowing how large your company will grow or what the potential is for expansion, once your lease is up, you can move to a new facility that is more accommodating to your business needs.
A commercial lease monthly rent payment is also tax deductible as a business expense, and if the market turns sour or if your location turns out not to be as prime as previously anticipated, you can simply walk away once the commercial lease agreement has expired.
The main disadvantage of a lease is that at the end of the term, you will not have any equity built up in the property. If you choose to walk away at termination, whatever upgrade costs that you incurred to adapt the property to your needs will be lost, and there is always the potential for increasing rental costs depending on how your lease is structured.
Remember, even if you want to stay on at the end of your lease, the landlord might have other intentions for the property that you can't do anything about unless it is stipulated in the lease agreement.
One of the most advantageous aspects of buying property for your business is that it is an investment that will increase the value of your business. Property generally appreciates over time, even during periods of slow economic growth, so investing in property on its own is a sound strategy. Owning your property also has the benefit of fixing your monthly expenses without the possibility of a landlord raising your rates.
If your property is initially too large for you to utilize all of the space, you can sublet portions of it to other businesses until you are ready to expand. If the property becomes too small to accommodate your growing business, you can always lease the entire property and acquire a larger facility while generating a profit on the lease.
The main disadvantage of buying property is the initial expense of acquiring it. Your business will need to come up with a substantial down payment to the mortgage, which can dramatically cut into operating capital. Another issue is that you will be responsible for the maintenance costs of upkeep on the building and making sure that the property does not decline over time. If the location you are in degrades in the future, it is possible that property values might degrade as well, which can lead to loss of equity.
While owning the property that your business occupies is a great way to build equity and maintain personal autonomy, it might not be the best choice for every business. Some businesses that are just starting out on a shoestring budget obviously cannot jump right into purchasing an entire building. Likewise, a successful corporation with a strong presence in the community will probably consider purchasing property for their expansion rather than leasing it. For the businesses in between, careful consideration and planning are fundamental to deciding whether to lease or purchase their next business location.
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