By David T. Domzalski
You’re at the point where things are picking up. You’ve generated enough revenue and profit to be able to expand to a new facility. Now, you have to consider whether you should buy that new place or rent it.
Before you go ahead and do so, here are a few points to consider:
Buying Pros
You own it all. By owning the property outright, you can enjoy the benefits of having your own place. You can do anything you want to it without having answer to a landlord. Aside from government regulations, you will generally be free to do with your property as you see fit.
Think of it as an investment. On top of owning the whole pie, you will be able to take advantage of tax breaks for small businesses as well as appreciation of your property. After all Ray Kroc, the architect of the McDonald’s empire, often said, “I’m not in the restaurant business; I’m in the real estate business.”
If you have extra space, you could even become a landlord yourself and lease it out to another business.
Buying Cons
You own it all. Just as you can consider it a pro, owning the whole operation can be costly. You’re responsible for all taxes and utilities. Additionally, if something breaks – it’s all on you.
You’re stuck there. If you buy your own space, you have to consider many factors. What is the neighborhood like? Is your target demographic well-represented here? Is the area a solid place for growth, housing development, and unemployment? You have to remember that if you are the owner, it will not be easy to just pick up and move. You have to sell the establishment first.
Leasing Pros
You can save on taxes and maintenance. If you have a landlord, guess what? You’re not responsible for the taxes and maintenance! Granted the landlord will probably pass some of those costs off to you in a lease, but you’re monthly payment will still generally be less. On top of the cost savings, you won’t have to be responsible for finding somebody to fix things. That is all on your landlord.
Small amount of upfront cash. With a commercial property, you are likely to have to put down 25% to 30% when purchasing the property. However, with leasing, you may only have to shell out the first month’s lease and security deposit. Furthermore, you won’t have to pay for an inspection, appraisal, and other fees as you would when purchasing the property.
Leasing Cons
You don’t own anything. Since you’re leasing the property, you don’t own anything. Not one thing (except maybe some supplies or office furniture). Therefore, you will not get to enjoy the benefits of appreciation or potential tax breaks. Also, your landlord would have the ability to raise your rent after the lease is up. So, you would either have to find a cheaper place or deal with the increase in monthly payments.
It’s a binding agreement. It’s difficult to get out of the lease. Plus, you put a lot of time and work into getting the place up and running. So, if you have issues with cash flow, with your landlord, or the neighborhood isn’t supporting your business as you thought it would, it might be tough to just pick up and move. Granted, you’re not locked in as much as if you owned the place, but it could still be difficult to get out of a lease agreement that isn’t working for you.
Now, you may be saying to yourself: “Well, thanks. But, this doesn’t help me at all.” This article is meant to help you start the brainstorming process. Some of these things you may have considered and some you may have just learned. The point is that this is something to start with. I suggest you consult with other business owners in your network, a small business attorney, and a tax accountant before you do anything. They will help you find out what will work for you and your business.
Good luck!
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David T. Domzalski is the founder of Financial Bin, a media company focused on personal finance and entrepreneurial education for Generation Y. You can contact David through email or visit his website: FinancialBin.com and david@financialbin.com
