Should I Lease or Buy
Maybe your business is growing, even busting at the seams, you’ve got people on top of each other, sharing offices, trying to talk over each other and it’s time for more room! Or maybe your business is stabilized, well established and your current lease is about to come up for renewal, or your looking and expanding into a new market. All of these situations presents you with a unique opportunity to consider the different benefits of leasing space or owning it. In this post we’ll discuss some of the pros and cons of both options and let you know some things to consider prior to committing one way or the other.
First we’ll look at buying
When considering buying an existing building you should also consider building new as an option, but we’ll be covering that in a later blog post. When considering the option of buying commercial real estate first and foremost you need to consider how it’s going to affect your cashflow. As we all know cash is our most precious commodity as a business and if borrowing money to purchase property is going to consume too much of your current liquid capital as well as put a strain on your month to month cashflow with mortgage payments it’s probably not a good idea to buy. Owning a building consumes considerable resources in the form of payments, interest, taxes, insurance, and maintenance. You’re also going to want to make sure that the property is a good fit for your business and that it will fulfill your needs for the foreseeable future. Just like owning a home, commercial real estate is an investment, and if you want it to pay off your going to want to stay there for awhile. When your looking at property to buy, you’ll also want to consider the construction costs involved. Obviously if you decide to buy vacant land you’ll have the cost of building a new facility, but the often overlooked costs of buying an existing building is renovating it to fit your needs. These renovations may include big items such as additions, to minor improvements like a fresh coat of paint and new flooring. You’ll also want to consider having the mechanical equipment updated in an existing building prior to moving in to avoid any interruptions once you are operating out of the space.
The benefits of owning property can be rather enticing. Once you own a property you no longer have to worry about lease rates increasing without notice, or your landlord not renewing your lease for any given reason. You have total control over the property, this can include deciding how building maintenance should be handled and when to complete necessary repairs. You are also free to make any improvements you deem necessary, and apply things like signage however it best fits your needs (assuming it meets city zoning regulations) without the prior consent of a landlord or ownership group. Ownership also has the financial advantage of both increasing the value of your business as well as being a good investment because real estate typically appreciates in value over time.
If your uncertain of the future of your business leasing is awesome option. This may be uncertainty of growth, location, or any number of other factors. Leasing gives you the freedom to move into a larger or more convenient space easily at the expiration of your lease. You can test out a new market by leasing a small space and if things go well you can easily move into a larger space after just a few short years. Leasing also puts most of the major exterior building improvement costs on the property owner so you won’t have to worry about major repair bills like replacing the parking lot, or putting a new roof on the building. The other advantage of leasing space is that it doesn’t tie up large portions of liquid assets to acquire keeping you capital free to help grow your business in other ways.
The downside to leasing a space is that it will almost always require a buildout prior to being able to move in. Depending on the property owner, you may be paying most if not all the costs for the build out on your own, essentially investing in a building that isn’t yours and if you don’t stay that money is lost. Build outs can get rather involved, especially if there was previous tenant and the space has to be demoed. Typically, in that instance the property owner would help cove the costs of the demo. Leasing space is also uncertain, and the end of your lease term rates could get increased to an unaffordable level, or you could even not be allowed to renew because a neighboring tenant needs more space.
Ultimately, you have to know which option is best for you and your business. Either way it’s almost certain that you’re going to need to perform some level of construction prior to moving into your new space. Remember when the time does come to move Build with Experience, Build with Dedication, Build with HCI! We would be happy to look at any space or property you’re considering and help establish of budget of the costs to renovate or build to aid in your decision to lease or buy.