In looking for the right location to operate your small business, you will need to decide whether you should buy a commercial property or lease commercial space. There are advantages and disadvantages to each, and you will have to evaluate several factors regarding your business plan, timing, financial situation, and future plans. You will need to weigh the pros and cons, do some research, and calculate the costs to help make these decisions.
Pros and cons of buying
The advantages of purchasing commercial real estate for your small business are numerous, and it can ultimately be a wise investment.
Property Control. You will have complete autonomy over the design of the space and can tailor it however you like to fit your small business needs. You can make decisions regarding retail space, office space, and storage without having to run plans and modifications by a landlord.
Accessible Financing Options. Commercial real estate purchases can be secured with minimal upfront capital through favorable financing structures. With options like SBA loans and seller financing arrangements, business owners can acquire valuable property assets without significantly depleting cash reserves.
Building Equity. You will be acquiring an asset for your business and building equity. Rather than paying rent to someone else, you are investing that money back into your business. That asset can be used to secure financing if needed to grow or reinvest in your business. And worst-case scenario, if your business were to fail, you could lease out the property to other businesses to continue earning income or sell the property, recouping your money and perhaps even making a profit.
Income Potential. You can generate additional income if you were to purchase a property large enough that you could sublease to other businesses. The extra space could be used if needed to expand your business, with you leasing it out in the meantime to offset the payments on your property.
Tax Benefits. You can take advantage of the tax benefits of owning your property to lower your tax liability. These include deductions on your mortgage interest, property maintenance and repairs, property taxes, and depreciation.
While these are appealing benefits, you will have to weigh them against the cons of purchasing your own property. These include:
Initial Costs. Money is required upfront to purchase property as you will need a down payment for a loan. This investment could tie up valuable cash you might need for growing your business.
Less Flexibility. You will also have less flexibility to grow your location and expand your existing space once you’ve reached capacity. If your location does not turn out to be ideal for your business, it will be much more difficult to move to a new location.
Higher Risk. It could turn out to be a risky investment if the location is not desirable. It could be difficult when and if you need to sell the property, and you might not recoup your investment and even worse, lose money on the transaction.
Live Oak Bank does not provide tax advice. This material is for informational purposes only. Please consult your tax, legal and/or financial advisor before engaging in any transaction.
