So, you’re ready to hang your shingle and open your business. You’ve looked at a lot of properties and have a pretty good idea about what’s available and how much it costs. The question remains – will you buy, rent or lease?
It’s not an easy decision (as with many decisions when starting a small business). But here are some things to consider when faced with the option of buying, renting or leasing your small business’ location.
Renting or Leasing
You may consider renting or leasing your space in the early stages of business when cash is too tight to buy. Compared to buying, credit ratings aren’t as important when it comes to leasing or renting. You also won’t have to suffer any major financial losses if you don’t own property when the market’s not so hot.
Other benefits of leasing or renting are greatly reduced moving expenses (no selling the property!) and a tax-deductible monthly rent as a business expense.
If you decide to lease or rent your small business space, we recommend having a lawyer review the lease agreement with you. Go over renting costs, the duration of the agreement, restrictions on the use of the property, subletting options, possible penalties and anything else you have questions about. And don’t be afraid to ask questions! It’s better that you fully understand what you’re signing on for. You should also find out if there are any restrictions around renovations you can undertake, or the kinds of signage and advertising you can put up.
However, there are some downsides to renting or leasing. Rental rates fluctuate. You could be paying more one year than you bargained – and budgeted – for. Also, your rent money goes into someone else’s pocket rather than invested in your own assets. And depending on the terms of your leasing agreement, you may have little control over some parts of your location choice, including staying where you are at the end of the lease.
When you buy a location for your small business, the money that you spend each month goes toward your own mortgage payments, which means more assets for your business instead of your landlord. The interest payments that you make on your location’s mortgage are tax-deductible. Since you own the space, you can make any renovations to it that you want. There are no rent increases. Ultimately, you have more control over the location.
However, with the control of owning your small business location, you also have more responsibilities. You’ll need more initial capital. There’s the risk of poor market conditions, which could put you at a loss when you sell. There are additional legal costs and requirements, additional operating costs and maintenance requirements – yes, you have to shovel your own sidewalk.
So. How do you choose between renting, leasing or buying your small business’ location? There’s really no one perfect or one-size-fits-all solution. Consider your specific priorities when it comes to your location, especially the length of time you plan to be there and how much control you want over your space.