Consider carefully the pros and cons of owning your own space for your business.
You may have reached a point in which you are wondering whether it would be beneficial for you to purchase a building rather than continue to lease commercial real estate space for your office, retail or industrial business.
While every business is different, there are a few common factors that you should consider when evaluating whether buying a building space would be better than continuing to lease space.
We at Commercial Real Estate Group of Tucson have a list of pros and cons to purchasing compared to leasing space.
Pros and Cons
Cash Outlay. If you purchase a building, you typically can expect to make a down payment of between 10% and 25% of the purchase price, depending on the lender and your credit.
When you lease space, you won’t put down nearly as much. With good credit, the typical outlay is the first and last month’s rents, which is about 10% to 15% of the cash outlay required when purchasing a building.
Opportunity Cost. The outlay of cash required to purchase a building ties up money that may be invested elsewhere. Consider what return you could expect to receive on that money compared to the return you would expect if you invested the money into your business operations or other investments.
Fixed vs. Variable Cost. When you buy a building, you have a good idea what your costs will be over the long term. This is especially true if you have a long-term fixed-rate mortgage.
If you lease space, the market will dictate what you will end up paying for rent over the long run.
Growth Considerations. If your company is relatively new or in a high growth mode, leasing would allow more flexibility and fewer constraints on that growth.
If your company is mature and stable, buying space is a way to meet your future space needs.
Property Management. If you own a building, it needs to be managed. You can either hire out the function or do it yourself. Many businesses with long-term growth plans buy a larger building than they need and rent out the expansion space. That increases the need for good property management.
Appreciation. One of the primary goals of buying a building is to generate a long-term increase in value through market appreciation. This is a good idea in a healthy market and usually successful over the long term.
Recent commercial real estate cycles have come in 10 year periods, so consider how long you want to keep a building to benefit from selling in a healthy market.
Tax Factors. Lease payments usually are fully deductible, but many expenses of owning space must be written off over longer periods of time, up to 39 years. You get to take depreciation on the improvement portion of the property and usually can deduct all of your interest payments.
When considering tax factors, it is always very important to consult with your attorney and tax professional about the legal and financial considerations to owning space.
Cash Flow Analysis
The devil’s in the details. In order to really understand the financial aspect of purchasing a building, you need to prepare a detailed comparative net present value cash flow analysis. This should include your predictions on the future
- holding period
- anticipated appreciation vs. rental increase
- interest rates
- cost of expenses increases.
It is a good idea to do three different analyses:
This helps determine your margin of error. It seems like a daunting task, but there some good programs available to help you do this analysis.
Better yet, consider getting advice and assistance from a commercial real estate professional who is involved in the business day in and day out. Contacting Commercial Real Estate Group of Tucson can significantly improve the accuracy of any analysis and simplify the process.
Many of the factors in buying versus leasing can only be decided by you, but having a helping hand in the areas where space expertise is important will assure you of making the best possible decision.
Commercial Real Estate Group of Tucson specializes in representing tenants and corporate users across the United States. For more information call 520-299-3400.