Your business needs a new location. Do you buy property to secure your future in a location? Or do you lease to keep your budget predictable for the next few years? Answering these questions and many others will shed light on your specific situation and needs.
Since many variables go into such a major decision, here are important facets to focus on to achieve the best outcome for your business.
Capital on hand
Commercial properties often require buyers to provide a significant amount of cash upfront. As a business owner, your main concern is if your business can afford the reduced liquidity that comes with a mortgage in exchange for stability.
If cost-benefit analysis says you can, buying space for your business builds equity over time. Your position becomes more secure as you get closer to paying off the mortgage. In addition, mortgage payments—even in expensive and demand-heavy Los Angeles County—are much lower compared to the asking rents for gross leases in the area.
If you don’t have the cash reserves for a purchase, qualifying for financing is the next option. However, the requirements are more stringent for smaller businesses. As a result, it’s often major tenants who can raise the capital needed for a big commercial real estate purchase.
In contrast, simplicity makes leasing attractive, especially for new businesses. In a gross lease agreement, you pay a fixed monthly fee until your lease expires. This allows you to budget more consistently and invest your profits in more crucial areas of your business.
As a tenant, you can also sign a triple net lease with a reliable landlord and access even lower base rents. The tradeoff is that you’ll cover a portion of the landlord’s insurance, maintenance, and tax costs.
For some properties, the landlord or owner might agree to a lease-to-own arrangement. This way, you benefit from leasing as your business builds its equity.
Current needs and capacity
What does your business need versus what can it handle right now? This question will direct your focus. Buying and, therefore, becoming a commercial space owner influences your business’s daily operation. There are more things to attend to as landlord and operator like other tenants, maintenance schedules, and liability insurance. These wouldn’t be a concern if you lease.
Taking on those extra responsibilities won’t make sense for a new business. The initial development stage may suffer from loss of focus, derailing future success. In contrast, a more established business, from its position of stability, can spread itself better to enjoy the additional inflows of passive rent income.
Leasing, meanwhile, offers businesses location independence and reduced commitments. This is especially important if you’re not interested in owning the property that’s currently available to you. By leasing, you can easily move your business to another location if it can better serve your business requirements.
Future growth
In general, choosing to take out a mortgage on commercial property will give you more value in the long term. If forecasts in your location point to rising property values, you stand to make a substantial profit if you decide to sell later down the road.
Aside from the prospect of potential profit, owning your own commercial space puts you in a good position to expand while possessing full control of variables such as rent increase, renovation, and lease agreements.
Note, though, that proper timing is needed in any real estate purchase. This is why you should always carry out a thorough research on the property type and location you want to acquire. If values for the area are on a downtrend or none of the properties for sale meet your needs, your business might be better suited for leasing while you wait for the right market conditions.
Which path is the right one for you?
Buying or leasing commercial space isn’t a decision made overnight. Weigh the pros and cons of each investment path according to what your business needs are now and how they will develop in the future.
Buy if you:
- want to secure continued presence in a location;
- can assume responsibility as both business and landlord;
- want to supplement profit with passive income; and
- find an area with increasing property values
Lease if:
- your business is in its early development stages;
- you’re in a location where it’s too expensive to buy;
- liquidity and location flexibility are highly important; and
- you are in an area with declining property values
Learn more about the advantages each option offers your business. Also, find out how you can buy a house in Beverly Hills. The Sasha Rahban Team will give you a detailed look into houses that are available in Beverly Hills, Los Angeles County, so you can make the best decision. Call us today at 310.963.9680 or send a message here.
