What are the advantages and disadvantages of purchasing real estate for my business?
Buying commercial property can be advantageous. Apart from building equity rather than simply paying rent, the pros of purchasing commercial real estate may include the following:
- You can count your new property as a business asset to leverage for financing or attract investors.
- Owning property can be a good long-term investment because property values tend to increase over time.
- Monthly payments on your mortgage provide your business with fixed overhead.
- You can generate additional revenue by leasing extra space.
- You can manage the property and use the space however you want.
The following are some potential cons of buying commercial space:
- The upfront costs are much higher.
- A lender requires a down payment. You might have to bear additional closing costs, such as inspection and appraisal fees, which may be difficult for small businesses or start-ups to afford due to limited cash flow.
- Commercial mortgages and other business loans tend to have higher interest rates than mortgages for residential properties.
- There is the risk that property values may not appreciate.
- You are responsible for all remodeling costs, maintenance costs, and any additional upkeep.
- You are responsible for ongoing expenses like property taxes and insurance.
- If you plan any construction or renovations, it is on you to make sure your property complies with all building codes and zoning regulations.
When purchasing commercial property, it is best to use a Special Warranty Deed. This type of deed protects businesses and business owners from liability for debts, damages, or any other problems that previous property owners might have caused.
Since property owners are held responsible for all maintenance, upkeep, and improvements, it is crucial to protect your rights and interests when hiring contractors to perform various tasks on any owned property. A good way to do so is to be diligent with drawing up work contracts, such as a Construction Contract, Painting Contract, or Interior Design Contract.
What are the advantages and disadvantages of renting real estate for my business?
Leasing commercial real estate can have advantages over buying, especially for small or new businesses, due to the flexibility of the arrangement. Before you sign a Commercial Lease Agreement, you usually have the chance to negotiate the price and terms with the property owner. Leases for commercial property typically last between one and five years with the option to renew the lease for additional one- to five-year periods.
You may have a fair amount of room to negotiate lease terms if your business needs are simple or flexible. For example, if you only require a suite in an office building, you may have many options in your area. If you require a specific type of space that is optimal for niche purposes, however, the property owner might have the upper hand in negotiations.
The pros of leasing office or other commercial space may include the following:
- The upfront costs are lower. You may only have to pay the first month’s rent and provide a security deposit at the start of the lease.
- Landlords may be willing to build out the space to meet your business’s requirements.
- You have increased flexibility to adapt as your business grows, adds staff, and expands its operations with annual leases. You can move to a new location much more easily when your lease renews at shorter intervals.
- The landlord or property management company often bears most of the maintenance costs. Unless your lease says otherwise, landlords typically handle any maintenance concerns that you bring to them.
- It is often easier to find spaces that are available to rent than commercial properties for sale.
Possible cons of leasing space for your business may include the following:
- You do not own the real estate, so there are limits on what you can do with or to the property.
- If you have a long-term lease, such as one that lasts for five or more years, it may be difficult to move out and find a bigger space if your business experiences unanticipated growth.
- While a lease’s upfront costs are usually cheaper, the monthly rent or lease payments could include extra or hidden costs. For example, some landlords charge commercial property tenants for common area costs or split utilities. A Triple Net Lease bundles property tax, insurance, and maintenance costs into the monthly rent payments.
- You may not get everything you want in the lease. The more demands you have, the less leverage you have to negotiate a lower rent.
When is it a good idea for a business to buy commercial space?
Buying commercial real estate is not ideal for every business. It requires capital, financing, and cash flow or consistent revenue. Small businesses and start-ups are often not in a position to pay the required upfront costs. They also might not have the credit history to qualify for a fixed-rate commercial mortgage at a reasonable interest rate. Leasing space is often the best option until a business has established itself.
Once a business is able to buy property, it can be a good way to diversify asset holdings. Real estate is often an excellent long-term investment. While property values can rise and fall, they tend to trend upward over time.
Your business can also create revenue streams when you buy office space or other types of commercial property. You can lease extra space to tenants for various uses, such as an office location or storage.
Finally, buying commercial real estate may bring tax advantages for your business.
- You can claim certain expenses as tax deductions, such as mortgage interest and maintenance costs.
- Depreciation of the property provides you with another tax write-off.
- Additional tax breaks may be available for certain uses of the property. You can claim a variety of tax credits, for example, by installing energy-efficient or carbon-neutral systems.
- Any gain on the sale of the property is taxed at the capital gains rate, which is lower than the federal income tax rate.
Talk to your tax professional to learn more about how owning commercial property could offer your business tax benefits.
What are the most important considerations when entering a Commercial Lease?
A typical commercial lease covers a vast array of issues. When evaluating a Commercial Lease Agreement, one approach is to treat it as if you were negotiating to purchase the property. What features would you and your business want or require in a property you are going to own? Important considerations may include:
- Square footage of the leased space.
- Amount of monthly rent and the method used to calculate it.
- Improvements a landlord is willing to make.
- Length of the lease term.
- Options and procedures for lease renewal.
- Options and procedures for buying the property if you have a Commercial Lease with Option to Purchase.
- Common areas and amenities.
- Operating hours and after-hours access.
- Security, including security staff, lighting, and door locks.
- Storage space.
- Location, including the nature of the surrounding neighborhood, zoning restrictions, and building code requirements.
- Maintenance responsibilities.
Are real estate agents required when buying or leasing commercial property?
You are not required to have a real estate agent when you are looking to lease or buy commercial property. This is to say that no law states that you cannot do it on your own. That said, you have much to gain and practically nothing to lose by retaining the services of a commercial real estate agent.
- As a buyer or renter, your agent is unlikely to cost you anything. Most agents’ fees come from a percentage of the sales price or your first year of rent. In either case, the current property owner typically pays them.
- Real estate agents have valuable knowledge and experience. They know how to find properties that meet your business needs. They know how to negotiate sales contracts or lease terms.
- Real estate agents have a fiduciary duty of loyalty to their clients. They are required by law to put your needs and interests first when helping you find and buy or lease a property.
If you have more questions about whether buying or leasing is right for your business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.