Commercial Property: Buy or Rent?
by Nick Gromicko, CMI®
So, you’ve moved your business from your home into a retail or commercial space, but now you’re stuck paying rent. Frustrating as it may seem, it may be in your best interests to continue paying for the right to use someone else’s space and let them deal with the headaches involved in ownership. Or, maybe the time is right to simply buy the property and stop paying rent. Below are some questions to help you determine whether owning commercial property is right for your business:
- Will the building help or hinder your growth? Take a look at how fast your company has grown and try to predict how much space you will require in the future. You do not want to be limited to the small storefront you’re in now if you’re growing fast. On the other hand, if your building has adjacent spaces filled with other tenants, you might be able to gradually grow in place by taking over neighboring leases.
- Can you pay the mortgage? Calculate whether your monthly costs would rise if you took on a mortgage. Is it much higher than the rent you were paying? If your business can't afford an increased expense, it could create cash-flow problems.
- Can you pay the down payment? Commercial building purchases may require large down payments, usually around 20%. If this payment puts your business into a cash crunch, it might be a better idea to hold off on property ownership.
- How much control do you need? You may eventually need to drastically alter your space as your company grows and discovers its own identity. You may want to, for instance, paint all the walls blue, knock down walls, or install heavy machinery that would be difficult or expensive to remove. Most landlords will not allow these sorts of alterations, especially if they are prohibited in your lease agreement. Purchasing a building will give you far more control over your own business and remove obstacles that would prevent its growth.
- Will write-offs be possible? If your business is profitable, property ownership can lessen your tax burden. You may be able to write off a portion of the building's cost each year in the form of depreciation. Another possibility is to buy the building personally and then rent it to your company, an ownership structure that has some tax advantages.
- Is a good building available? Research the market to see whether it’s a better idea to buy your existing building or find a more desirable location nearby. Keep in mind that moving and altering a new location will add to your business's costs and require advertising to let customers know where you've gone. An experienced commercial real estate agent should be able to help you with this research.
- Are you cut out to be a landlord? Maybe you’re fed up with dealing with a landlord, but are you ready to become one? If your building has other tenants, you’ll need to deal with all sorts of problems that arise and make difficult decisions ranging from building improvements to rent increases. Do you have the time to accommodate these additional responsibilities? Do you have the managerial skills that are necessary? If not, and you still want the property, consider hiring a good property manager.
- What is its potential as an investment? Distance yourself from your business for a moment and remember that property ownership is itself an investment. You might need to sell the building in the future, which can make you money even if the business goes broke. You may, for instance, want to purchase a building that you know won’t attract that many customers if you think the building’s value will increase enough to make up for the lack of sales. Is the building in a thriving commercial district that’s popular and full of tenants, or is it mostly empty? Investigate the price trends. Will you be in the location long enough for it to increase in value?
In summary, the decision of a renter to buy commercial real estate requires a large investment of research and judgment. A commercial property inspector can help.
Make sure your commercial property inspector uses the International Standards of Practice for Inspecting Commercial Properties.
