Finding and paying for a facility for your small business can be stressful. Most of these businesses, especially when they are in the startup stage, have limited funds to pay for commercial real estate and all the costs that go with it. If you are a small business owner, you have probably debated between purchasing and leasing your commercial space.
Leasing Your Space
When you lease commercial real estate, you typically have to pay a security deposit, attorney and broker fees, and a pre-lease inspection. In addition, you will have to have your utilities set up, which may come with fees. However, these costs can be immediately deducted from your taxes because they qualify as operating expenses. You can also deduct your property taxes and insurance as well as maintenance. Unlike a mortgage payment, your entire lease payment is deductible.
You also have greater flexibility with a leased property because you can always move. This is beneficial if you grow out of your current location or find that the location isn’t ideal.
Unfortunately, you will likely never see a return on any of the money you put into property upgrades, except that you can deduct these expenses from your taxes. In addition, your lease payments are likely to be higher than your mortgage payments would be, and you are responsible for property tax and insurance even though you don’t own the real estate. Finally, you have no control over what happens with the property, and if you want to remain after your lease ends, your landlord has the right to significantly increase your rent.
Purchasing Your Property
The greatest benefit you receive when you purchase commercial real estate is that every dollar you put in becomes equity. In addition, most commercial properties appreciate in value over time. Therefore, you can sell or refinance your space in the future to increase your cash flow. You have full control of your property, so you can earn an income by leasing part of your space to other businesses. Not only will your rental income increase, but if you have retail space, your foot traffic, and thus sales, may also increase. You can also deduct your interest, depreciation, and other expenses (not associated with your mortgage) from your tax burden.
However, you need to provide 10-20% of the loan value upfront, and also have closing costs and due diligence fees. In addition, you are liable for anything that happens on your property. Although it is uncommon, your assets can decline in price, and real estate is not liquid, so selling and getting your money back out of your property could be problematic.
Before you make your lease versus purchase decision, be sure to get all the information and calculate the actual costs and benefits.