If your small business is growing and you’ve been leasing office space for a while, you may be tempted to buy. But, don’t assume that buying real estate makes sense for all businesses all the time. Before you leap, consider whether leasing or buying offers the better business case for your business. Here’s how to decide…
On www.microsoft.com/business, tax professional Joseph Anthony writes that it’s likely that eventually, most businesses will face the question of leasing or owning space. The good news is that whether you’re a yogurt shop or a marketing firm, most small businesses can evaluate some similar factors in order to make a sound business decision.
How much cash is required? If you’re leasing now, you already know you didn’t have to put out much money upfront—certainly nothing compared to the down payment you’d need to come up with for a purchase. And, that’s not even counting other out-of-pocket expenses that would be part of the transaction, like appraisals, inspections and miscellaneous fees. Every small business knows all too well that cash is king: If you’re looking to buy property, can you afford to part with a sizeable amount of your money?
Are the costs fixed or variable? Anthony says that buying a building can give you the assurance and peace of mind of knowing, month after month, what your costs will be (This assumes a fixed interest rate on your mortgage loan.) When you’re leasing, though, you’ll need to renegotiate the terms when your agreement expires—and a lot can have happened in the meantime to change your negotiating position.
Do you see growth ahead? If you buy space that fits your current size, what happens if you grow substantially over the next few years? This doesn’t mean you should not buy, Anthony says, because there will probably be other options open to you to accommodate your larger company. On the other hand, it could mean more upheaval than you want to take on. Just be sure to factor in the possibility that you could outgrow the space and have some contingency plans in place.
Will it appreciate? Owning commercial property can be profitable over time. Or not: Just look at the last five years when the bottom fell out of the economy. In some areas, too, commercial space continues to be overbuilt, decreasing its value.
How many hats do you really want to wear? Anthony points out that small business owners who purchase commercial property become commercial real estate investors. And if you buy more space than you need and end up leasing it to others, then you become a commercial property landlord. We may be talking more risk, more work and more headaches than you signed up for! Or, you could be talking way more profits; it all depends on how much you want to take on.
Tax considerations. Where would we be without tax issues to consider? It may be stating the obvious to say that things like tax write-offs and depreciation differ considerably if your business is paying rent versus if you own the property. It’s complicated. The best advice? Anthony recommends always consulting with an attorney and tax professional to make sure you understand the legal and financial ramifications of any transaction.
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