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Should I buy a building or lease space?

There are a few ways to look at the answer and it’s different for everyone based on your situation.   

Take a look at your current rent. What is it costing you? Speculation is that interest rates will likely rise after the election and borrowing money may become increasingly difficult. Buying or renting depends on the funds that are available to the tenant or buyer, and the best use of those funds based on their current situation.

“Usually startup businesses don’t have ample funds so they need to use those funds to grow the business, meaning they should rent,” says Herb Arathoon, CPM®, a regional property manager and broker with Compass Commercial.

On the other hand, Arathoon notes the tax benefits of owning.

“If a business is mature, generating a lot of cash, and the owner is paying a large percentage of his income in taxes, he should look into buying the building because then part of the monthly payment is going towards principal and he gets the tax write-offs of owning real estate.”

There are other advantages of owning the building where you operate your business, such as the preferential treatment by banks for the loan, less down payment required, better rates and you may qualify for an SBA loan.

Buying a building can offer a nice rental income when you decide it’s time to sell the business. Terms of a business sale could even stipulate that the business must remain in the building for a set number of years. Here are a few more questions to consider when you’re making the decision to lease or buy a building:

  • What kind of property are you looking for?
  • What are your longer term goals for the property as well as the business (owner/user, rental income, equity, etc.)?
  • Can you afford to buy the property? Do you have cash to buy outright, or for the down payment if you will need financing?
  • Are there benefits to the type of business that come from owning vs. renting?
  • How long do you anticipate being in the building?
  • What location is necessary (think of zoning, workforce, land-use permits, etc.)?
  • Would you be willing to partner with someone else on the property?
  • What’s your risk tolerance?
  • How much work are you willing to put into the property?
  • What kind of property manager might you need (or not)?

In essence, there are three parts to making the decision to lease or buy a property for your business:

  1. Scarcity or abundance of working capital
  2. Borrowing capabilities
  3. Time needed to run the business in addition to managing the building you own

It’s important to remember that being an owner takes time and effort. If you decide to buy a building with other tenants, consider hiring a professional property management company to free up your time to focus on the business and not the job of managing the property. Fear of property management should not be a factoring decision in whether you buy or lease. In most cases, a professional property manager can be retained for 5% to 6% of the rent.

A commercial real estate broker can help you evaluate each scenario and advise you on the best course of action based on your current situation.

Herb Arathoon, CPM® currently manages 20 properties including office, industrial and retail buildings. His duties include day-to-day management, emergency response, budget preparation, CAM/NNN report reconciliation, vendor hiring, common area supervision, maintenance and repairs for our clients.