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Whether you’re starting a new venture or you’re already in expansion mode, one question you may be grappling with is whether to purchase or lease commercial space for your small business. While buying commercial property comes with many perks, including building equity and being able to customize the property to meet your needs, it’s not a decision to make lightly. Here are some key things to keep in mind when you are thinking about buying real estate for your business.What Are the Benefits to Buying Property for Your Business?
There are many ways your small business can benefit from owning commercial property. These include:Control As a property owner, you can customize, remodel, or renovate the facility whenever you want without seeking approval from anyone. When you have a commercial lease, on the other hand, you’re only allowed to do what your landlord approves. Equity Owning is an investment that can increase in value over time. When you are leasing an office or warehouse, your monthly payments go to rent, rather than equity, which means you won’t end up with a permanent asset that you can rent out or sell in the future. The equity that comes with ownership also makes it easier to secure financial products, such as a long-term business loan or business line of credit, which could help further grow your business. Income opportunities If you own your business property, you may be able to rent out excess space you’re not using to another tenant and/or sell billboard or signage space on the property. This can give you an additional income stream to help offset the monthly mortgage payments. Tax perks As a property owner, you will likely qualify for mortgage interest and property tax deductions each year. Any money you spend on repairs, remodeling, renovations, and insurance may also be tax deductible. Fixed payments If you choose a fixed rate mortgage for your commercial real estate loan, your payments will stay the same for the life of the loan. When you rent, the amount you pay is at the discretion of your landlord and is likely to go up when negotiation time arrives. Often it’s not a question of if, but how much.Public exposure Owning, customizing, and improving your place of business gives you an opportunity to show off your brand and establish the personality of your company for everyone to view.Recommended: Land Loans or Personal Loans to Buy Land Owning vs Leasing
While buying commercial property can be a wise investment, there are also advantages to renting space for your business. One of the main perks of leasing is flexibility — it’s much easier to move to a new location when you’re renting than when you own your property. Another major advantage of renting is lower upfront costs. Since the cost of starting a business or growing an existing company is already steep, it may be difficult to come up with a downpayment for a commercial property, which can run anywhere from 10 to 40% of the purchase price. Renting space for your business allows you to hold onto more of your company’s cash. To help you decide whether buying a commercial property makes the most sense for your business, here’s a side-by-side comparison of owning vs leasing. | Owning | Leasing |
|---|
| Costs | Need to come up with a downpayment, but monthly payments will be fixed. | Keep more of your cash on hand, but landlord is likely to increase rent over time |
| Control | You can customize your space to suit your needs | Little opportunity for customization |
| Income opportunities | May be able to generate passive income through leasing or advertising | No income opportunities |
| Equity | Build equity with each monthly payment | No opportunity to build equity |
| Taxes | Mortgage interest, property taxes, and depreciation are typically tax deductible | Rent may be deductible as a business expense |
| Risk | There is a chance the value of the property could decline | Little risk involved |
What to Look For When Buying Commercial Property
There are four primary factors to consider when comparing commercial real estate properties for your business.Location
If your business model relies on the brick and mortar approach to getting customers, then the property needs to be visible and easily accessible. Even if the space will only be accessed by employees and/or clients, you’ll want to make sure that parking is easy and there is public transportation nearby. Property Condition
A property may be in an ideal location, but if it has you spending a lot of money on it just to make it safe and presentable, you may want to pass. It’s always a good idea to have a thorough inspection done of the property and find out beforehand about any major repairs that may be needed, like a new roof. You’ll also want to know about any potential environment or liability issues, such as asbestos or lead paint.Zoning and Building Codes
When looking at commercial spaces to purchase, be sure to ask about any zoning or building restrictions. Just because the property is designated as a commercial property doesn’t mean any kind of business can be conducted in that location. There may be limitations on the type of business and amount of foot traffic that is allowed in the neighborhood. There may also be codes that limit changes you can make to the outside or inside of the property.Future Plans
When purchasing commercial property, don’t just think about next year — think five to 10 years out. If you want to expand one day, would you be able to do so? Would zoning laws allow you to take your business in a new direction? Is there an opportunity to expand and make passive income from tenants? Buying commercial property is a big investment, so you will want to make the most of your purchase.Question to Ask When Buying Commercial Property
As you look at commercial space, it’s easy to get excited about all the possibilities and forget to take a close look at all the details of the deal. Here’s a checklist of questions to ask about each potential new home for your company:- Why is the commercial property being sold?
- Is the title clear (with no encumbrances against the property)?
- Does the zoning code allow for your proposed use?
- Are there any environmental concerns?
- Is there insurable access to the property?
- Are there any major issues with the building?
- Are there tenants?
- Is there a detailed record of operating expenses and other financial records pertaining to the property?
Who Should Be Involved in the Buying Process
One key tip for buying commercial property — don’t try to do it alone. Here are three professionals you’ll want to have on your team.Commercial broker A commercial real estate broker can help you locate properties that suit your needs and budget. They may even be able to notify you of properties before they even hit the market. Accountant An accountant can help you run the numbers and make sure the purchase will work with your company’s budget. They can also help you assemble all of the financial documents needed to apply for a small business loan, help you navigate the tax benefits and forecast your operating budget.Lawyer A real estate attorney can help represent your best interests during the transaction, from negotiating the best deal to completing the entire transaction.How to Finance Your Commercial Property
Buying commercial property is a chance to build equity, make your expenses more predictable, and possibly gain tax advantages. You may even realize a monthly cost savings versus renting, particularly if you are able to secure a low interest loan.If you’re interested in investigating your small business funding options, Lantern by SoFi can help match you to loan products that meet your company’s needs and qualifications. That can help you spend less time searching for financing and more time finding the perfect property for your business.
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About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
