The right time to buy your building vs. leasing and paying rent starts with situations where:
- The property is listed and the new owner may not renew your lease
From there, it can also depend on factors outside of your control such as:
- Interest rates
- Appreciation and depreciation of the value of the property and building
- Natural disasters
- Insurance companies willing to insure the building
- The economy bringing more business or driving it away from your area or your company
- Seasonality (i.e., the consumer housing market has more demand in the summer versus winter)
There isn’t always a clear-cut situation where you should buy your building or continue to lease, but there are times when the conditions are right for the purchase option. Below is a bit more detail on each of the examples from above, as these are some of the best times to buy the building your business is in.
You Have the Cash Flow to Make the Deposit
If your building is up for sale, you have the cash flow for a deposit, your net revenue can cover the cost of payments on the mortgage, and you know you’re going to be happy in the location for a long time, it likely makes sense to buy the building your business is in. Instead of losing money from paying rent, you’ll be building equity.
If in the future you decide to relocate your business, you’ll have the option to sell the property for a profit or rent it to another business and make money through the lease. Buying the building is buying an asset, which can make sense when you have the cash flow to cover the deposit without risking day-to-day or near-term operations.
You Need to Expand and Don’t Want to Move
When you’re ready to expand your business because your product line is expanding, buying your building may be the only option. The current owner may want to keep leases separate so they don’t have to worry about one business leaving and stopping cash flow if real estate is not in demand.
Another situation could be the landlord not letting you lease the space next to your current business because they want to hold it or not allowing you to tear down the wall for more floor space.
By owning the building, you can control how much space or how many units you can use. You get the flexibility to rework or redesign the interior, and if you’ve always wanted to refresh both the interior and exterior, this is your opportunity, assuming you can get the permits from your local government.
Real Estate Is Scarce and Rarely Goes on Sale
Zoning laws can be strict and prohibit the amount of retail and manufacturing space available. Combine that with land being a limited asset in that there is a finite amount of it. When your building goes on sale (something that likely won’t happen again in the near future), this is your opportunity to secure the land and protect your company’s location.
By buying, you won’t have to worry about a new owner evicting you and you’ll have an asset you can rent in an area where space is limited in case you decide to sell your business.
The Property Is Listed and the New Owner May Not Renew Your Lease
When a new owner buys the building, they may have different plans for it and not renew your lease. This can create multiple problems including:
- Getting customers to come to a new location, especially if it isn’t located nearby
- Moving machinery and equipment
- Needing staff to have a longer or less convenient commute
- Paying more for a new lease if rents have gone up
- Not having the amenities that made your workplace as appealing to team members
If location is vital to your business, for both customers and team members, look into buying your building versus losing one or both.
You’re Ready to Expand Your Assets
Asset diversification can be a good way to futureproof your business. If land in your area is expected to increase in value, buying your building becomes an investment where you pay lower capital gains tax if you decide to sell in the future. Renting extra space in the building while you own it brings in a different source of revenue that can offset unexpected declines in your regular business.
You Plan on Being in the Location for a Long Time
If you love the location of your business, the future looks stable, and cash flow is strong, these could be good reasons to buy your building and secure it for the long run.
Location matters when it comes to running a company, and it is hard to get the right balance of distance from home, amenities like restaurants or retailers nearby, a gym on the premises, and close proximity to schools, condo buildings, and entertainment venues.
If everything aligns with your goals and it is unlikely the area will change in the near future, consider buying your building. You don’t plan on leaving, and this is a way to ensure you don’t have to move if a new landlord steps in.
The Cost of a Lease Is Higher Than a Mortgage
When the cost of a lease is higher than paying a mortgage, and you cannot find an equally good space to rent, buying your building makes sense. If you’re only one of multiple renters and real estate is in demand, add in the cost of their leases with your own and compare that to the mortgage.
The cost of a lease here isn’t your lease only, it is the price of the building. When it works out that you’ll be saving money compared to paying rent, and the cost of owning and maintaining the building works in your favor, it makes sense to buy the building your business is in versus looking for a new location with cheaper rent.
You Want the Tax Deductions and Investment Properties
Buying the building your business is in can come with tax deductions including depreciation, the costs of maintenance and upkeep, possible mortgage interest deductions, and property tax expenses. The IRS has this guide on what and when tax deductions and depreciation can happen.
Talk to your licensed accounting professional to make sure, but buying the building may lead to a lower tax bill in some cases, or a more reasonable one if you have the cash flow to make the deposit and payments.
The other side is having an investment property. Some real estate investors sit on properties while waiting for them to increase in value, or renovate while the costs are low, and then they sell. When your cash flow is strong and you’re looking for deductions or investment properties, that could be a sign that it is the right time to buy your building.
You Prefer Equity Over Debt for Funding
Owning a property comes with headaches like maintenance and tenants, but paying rent means you’re losing money every month in rent. If you prefer building equity and being able to borrow against it when cash flow gets tight, buying your building gives you this flexibility. Just be certain you’re ok with the additional responsibilities of commercial property ownership.
When You Have Specialty Equipment and Large Machinery
When you have specialty equipment that can be easily damaged if moved, it may make sense to buy your building, so you don’t end up damaging or having to disrupt your operations in the event you lose your lease. The same goes for large machinery and heavy equipment.
If your company grows, but the owner of the warehouse or manufacturing plant pulls your lease, it could be expensive to rent a new property and have to move the machinery. Saving the headaches and expenses of moving the machinery keeps your operations flowing and reduces the expenses of disassembling, transporting, and reassembling the machinery.
Customer Loyalty and Convenience
Building a loyal customer base is hard to do, and if you must move because you lost your lease or are moving because you need more space, they may not follow you if similar businesses are closer to them.
If you’re a coffee shop and have morning or lunch regulars, the new location may be out of the way from their work. Hangouts for high school and college students also rely on proximity as transportation can be an issue.
Buying your building ensures you can keep the location. If you still want to expand, you have the option to open a second location instead of moving your current business. The bonus here is you have revenue coming in vs. having to start from the ground up. If the new location works well, you may be able to start a third or fourth and build a larger-scale brand.
If you’re in a situation where you’re deciding on buying the building your business is in versus having to move or relocate, and you need financing, we can help. We work with the nation’s best lenders and financial institutions and match you with options that are tailored to your unique business needs. Click here to see your top recommendations today.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
