As your business grows and matures it is almost inevitable that you will wonder whether you want to buy or rent space to work from. Ultimately, the choices you make can have a significant long-term impact on your business. Owning a building seems like something every successful business should do, but it’s not always the case. For many companies, it makes more sense to continue to rent space in order to gain time and capital that can be better used elsewhere. These are the most important things to consider before buying a building for your business:
When buying a commercial property, it is important to consider not only the upfront capital in the form of a down payment (typically at least 20% of the purchase price), but also the ongoing running costs of the building such as:
- Interest and Insurance Expenses
- Management fees (if applicable)
- Repairs or replacements of systems and infrastructure
These costs can be significant and often surprise a building owner. Proper planning and a disciplined approach to maintaining capital reserves to deal with these unexpected costs are vital. Leasing a property, on the other hand, takes responsibility for all of these costs with the owner of the building, so you can only focus on paying the monthly rent.
Consider the relative illiquidity of a commercial property. If there are a number of reasons that you have to or want to sell your property, it is important to understand that doing this can and probably will be a lot of time, and the building will require further maintenance during this time which will cost money. With leasing, on the other hand, your financial commitment is limited to the number of monthly remaining payments for your leasing.
It is often pointed out that owning a building is almost like owning another business, especially if they want to rent part of it to other businesses. Aside from the obvious upkeep, repairs, and general upkeep of the property, there is quite a bit more to do. These things can consume valuable hours that would otherwise be spent growing your business. The benefit of this is that with every hour you invest in the building, you build up equity and long-term wealth as your assets increase in value. In addition, you protect yourself against rising rental prices and secure a location for your company for many years.
Often times a building is placed in a standalone holding company so you will need to keep careful accounting records, make them available to your CPA and lender every year (or more frequently if necessary), file and pay taxes, keep bank accounts, and keep other necessary business records up to date Stand. With a rented building, you simply write a check for your rent, which will be deducted as a business expense in your company’s books.
If you intend to rent part of your building to other tenants, your time expenditure will increase significantly as you have to advertise the space for rent, review potential tenants, prepare and manage leases, collect rental payments, take on additional wear and tear – and demolish and maintain it Building and dealing with other inevitable problems that will arise as a result of being a landlord. You also want to keep your tenants happy because every month this room is unoccupied and rent generation still costs you money. If you do decide to become a landlord, you will quickly learn why many building owners choose to pay a management company for all of the things associated with owning a building.
Knowing and understanding the credit requirements for buying a property can help you make an informed decision that will not only benefit your business, but also reassure you that whatever decision you make, you are making the best choice for you and your business to have.
For more information on buying a building for your business, contact our Commercial Real Estate team.