The decision to purchase commercial real estate is a momentous one for any business. The benefits of ownership can be substantial, but a commercial purchase can also have drawbacks. It’s important to assess the pros and cons to make the best decision for your business.
1. Upfront Cost
Naturally, a real estate purchase requires a significant outlay of funds as a down payment — anywhere from 10-40% of the purchase price, not including closing costs, inspection fees, and other upfront requirements. For some business owners, this amount of cash is simply prohibitive.
That said, if you have the funds, a hefty down payment on a property allows you to begin building equity and growing your ownership stake in a property and business. Subsequent monthly payments continue to go, in part, towards the principal loan amount. Instead of paying a landlord every month, you are building your own stake in your business.
2. Control of Your Business Environment
A purchase of commercial real estate may allow you to have a greater stake in the physical landscape of a business than you would if signing a lease. As your own landlord, you don’t have to worry about unexpected rent increases or unsavory adjoining tenants. In fact, purchase of commercial property offers the potential for additional income through leasing out portions of the property. Renting space to retailers, restaurants, or office-based businesses may offer its own growth opportunities for your business.
However, keep in mind that if you do go this route, you’ll have the added requirement of being liable for yourself and other tenants. This may include carrying additional insurance, paying for repairs and other necessary work as needed, and responsibly managing a physical space.
3. Need for Flexibility
A major factor in the decision to purchase commercial real estate may be flexibility: How do you see your business changing and growing over the next several years? If you envision yourself potentially moving within a short period, renting may be a more attractive option. If not, a purchase may be appealing.
Either choice also comes with its own financial imperatives. While ownership conveys potential benefits like asset appreciation, the ability to build equity, and certain tax benefits, it also contains possible drawbacks. For various reasons, your investment may depreciate, and you could take a loss on your property. You also may soon find that your business requires a different sort of physical space, and you’ll be on the hook for selling a property.
A commercial purchase of real estate can offer exciting, creative possibilities for your business. Prior to taking this significant step, though, be sure to thoroughly weigh the potential benefits and drawbacks against what is best for your company.