Your commercial space: to buy or lease?
Rent an expense... or own an asset.
Whether you're a dentist or a retailer, lawyer or property developer, every business owner at some point has to decide whether it makes more sense to own their operating space rather than lease it. Here are some pros and cons to help you weigh your options.
The pros and cons of owning.
| PROS OF OWNING | CONS OF OWNING |
|---|---|
| Fixed costs. A mortgage (along with regular operating expenses) can give your business clear, fixed costs. | Upfront costs. Buying commercial space will initially cost far more. Along with a large down payment, there are property, appraisal and maintenance fees as well as possible improvement costs |
| Tax deductions. Owning and running a commercial space can provide deductions like mortgage interest, property taxes and other expenses. | Ongoing additional expenses. Property taxes, utilities, and maintenance costs will all affect your bottom line. |
| Additional income. If there's more space than you need, subletting can add another revenue stream. | Lack of flexibility. A new or growing business may have unexpected needs, and it may be challenging to borrow additional funds. If you continue expanding, you may outgrow the space, forcing you to sell. |
| Asset appreciation. Property almost always appreciates over time and can be an excellent investment, particularly in the Lower Mainland and other parts of BC. | Less time. Owning requires you to get involved in the property management business. Do you have the bandwidth? |
The pros and cons of leasing.
| PROS OF LEASING | CONS OF LEASING |
|---|---|
| Free up working capital. When your money isn't tied up in real estate, you can respond more nimbly to market opportunities. | Variable costs. You may be subject to annual rent increases or a major increase when your lease expires. |
| Affordability. If your business is dependent on location and image, such as professional, retail or a restaurant, leasing in a good high traffic area is much more affordable than buying | No equity. Your lease payments add to someone else's bottom line, not yours. |
| More time. Any type of ownership comes with headaches. Leasing lets you focus on running your business. |
Other considerations before you buy.
- Examine your cash flow. After a substantial down payment, you'll still need to maintain cash flow and have enough in reserve to cover the unexpected.
- Confirm your commitment. Are you truly ready to take on the additional responsibilities for maintenance, security and management that come with property ownership?
- Consider your time frame. If you don't expect to stay in the building for at least several years, buying might not be the thing to do right now. (Although if real estate values keep escalating, it may still be a smart move.)
- Ensure room to grow. If you have to hire more employees, will there be enough space? Will you need more meeting rooms? It may make sense to buy more space than you need right now and sublet it until it’s needed.
The right advice makes all the difference.
The answer whether to lease or buy commercial space is different for every business. Your decision will hinge on financial, tax and personal issues. Don't make it alone. Bring in your business advisor to help you carefully examine all aspects of taking this major step.
Your business advisor will provide an objective perspective, keeping the balance between the personal and professional sides of your financial life, making sure you have a fully integrated plan. Specialists who work with your advisor can also review all your insurance needs involved in acquiring new space.