Answering the Lease vs. Own Question for New Businesses
So you’ve decided to open your own business. It’s an exciting time, of course, but it’s probably left you with many questions. As you begin to write and rewrite your business plan, one big question may start to loom: Is it better to own your workspace or to lease it?
There are pros and cons to each, so this post will serve as a guide to help you make your decision, as well as give you a few good questions to ask yourself before committing to either.
The Benefits of Owning
While owning your space may come with a larger initial price tag, there are still several benefits to consider:
- Freedom to change the space. One of the greatest advantages of owning the space is being able to decide what you’ll do with it. Those who own have more freedom to tear down walls, rebuild portions and truly customize the space to suit the needs of their business.
- Predictable payments. A mortgage payment, much like that of buying a house, is predictable. Depending on how much you put down at the start of the purchase, your mortgage payment could even be lower than a lease payment, which will help free up some funds for other monthly expenses.
- Property appreciation. Unlike cars that depreciate in value, properties, in most cases, tend to appreciate, or increase, in their value over time. This is especially the case if you make improvements.
Choose a property wisely and keep a close eye on what other properties in the area are worth, what kind of neighborhood you’re buying into, etc. You want to be surrounded by other properties that are also increasing in value, as it will make yours that much more appealing.
- Potential for additional income. If there’s room, you may want to consider renting out some of the space to other area businesses. Becoming a landlord for yourself and someone else can mean some additional income to cover your mortgage payment or other expenses. For some good reading on investing in commercial real estate and what it can mean for you, take a look at this article from Matt Larson at NOLO.
- Tax benefits. Just like when you own your home, there can be tax breaks available to you. You may be able to receive credit for interest payments on your commercial mortgage, which can make that monthly payment more appealing and easier to handle. For full details on commercial mortgage tax breaks, get in touch with your tax agent, who can to fully explain what may be available to you.
What You Should Think About Before Signing the Mortgage
The thing to remember about owning your space is that you are responsible should things like repairs be needed. There are also some other things to keep in mind before you sign on the dotted line:
- The likelihood of repairs. When the property is yours, the repairs are, too. This can be difficult when unexpected things happen, like pipe breaks, window cracks, etc. If you do decide to own, make sure the space is thoroughly inspected prior to closing to bring to light any potential issues or hazards.
- Zoning ordinances. Though the space is customizable, there can be limitations, even when you own. Zoning ordinances can keep you from adding on to the property or using part of it for residential spaces. If you know your long-term goals involve some big changes, check out what’s possible to do on the property before signing the mortgage.
- The down payment. The initial down payment can be a drawback for some, as much of that cash could be used for investing in your start-up essentials for your business.
- Becoming a landlord. If you decide to rent out part of the space, you become a landlord for someone else. This can mean additional cash flow, of course, but it can also mean greater responsibility for taking care of your tenant’s needs.
The Benefits of Leasing
Jumping into a mortgage usually means a longer-term commitment and more upfront costs. So, there can be some significant benefits to renting or leasing a property, such as:
- Short-term commitment. If you’re not sure what kind of profit your business will be churning the first few years, a lease may be a good way to go. Leases are available for multiple commitment periods, and it may be that the first lease signing is a small deal as you get your feet wet. As your business continues to grow, you can lengthen or renew the lease. Who knows? You may even need to find a larger property to lease or own.
- More money to invest in starting up. Without forking over a large sum for a down-payment at signing, your startup cash is a little more — well — available. Invest the extra cash in purchasing equipment to get you started. Any “additional” can be saved to go toward a down-payment for a future space.
- Fewer repair worries. One of the greatest benefits of renting or leasing a space is determining who is responsible for repairs. Most often, it’s your landlord. Work out who will take care of what, and you’ll find just putting a work-order into your landlord can be a lot easier on the wallet than paying for the repair yourself.
- Tax benefits. There are certain tax benefits that come with owning a business in a leased or rented property. According to the IRS, for example, your rent and lease payments may be tax-deductible. To see if you would qualify, contact your local tax agency.
What You Should Think About Before Signing the Lease
Just like with owning a space, renting comes with its share of circumstances to consider before deciding if it’s going to be the best option for your business:
- Space flexibility. Renting a commercial space can be a lot like renting a residential space, with rules against modifications. Your landlord may be resistant to changing or customizing the space too much, especially if the lease terms are shorter.
- Potential for rent increases. You may want to scrutinize your lease agreement and look for any clauses about potential rent increases. Many times, landlords reserve the right to increase the rent or lease payment due to them, so getting some clarification early on can be helpful.
- You don’t own the space. This may seem like a no-brainer, but not owning the space means the money you spend on it goes to someone else. This can be a hard one to swallow when the lease is up and you realize how much has been spent paying for someone else’s mortgage.
There’s a lot to consider and calculate when deciding whether to own or lease your business space. Use this article as a guide to making the decision that best suits you and your business needs.