Whether you run a manufacturing plant or a small boutique, it can be challenging to choose between owning your business’s location or leasing it. Owning a property comes with pros and cons — it’s not a simple decision, and it’s important to weigh them carefully.
Here are four pros (and four cons) of owning your property.
Owning Property vs. Leasing Property
Owning a commercial property is pretty straightforward, yet many business owners don’t necessarily consider it as an option. In addition to regular business startup costs, business owners who choose to purchase property need to secure a loan, come up with a down payment, and take responsibility for the property at closing.
Leasing or renting a property is the more common path many businesses take. If a so-called operator rents from a new investor who is trying to attract tenants while renovating or building an investment portfolio, they may offer an initial period of free renting or other perks. This can be a great opportunity for startup businesses to eliminate rental costs while they get their enterprise going.
In general, a lease covers a range of services over a set period. The most affordable leases are long-term and include very little maintenance or services from the landlord. Leasing does not come with any initial costs beyond rent and a security deposit, but depending on the type of lease, business owners have little control over what they can do with the property in terms of improvements or changes to its use.
4 Pros of Owning Your Property
Business owners who set goals for real estate investing and business expansion that include a long-term commitment to one particular city can take these four pros of property ownership all the way to the bank.
1. Control of the property
Leasing comes with rules and requirements that can feel restrictive and limit a business’s growth, especially during the initial stages of its establishment. Landlords may specify the type of use (beyond zoning rules and regulations), or they may set times, hours, or days of operation.
Ownership means that — within local laws and zoning restrictions — business owners can do as they please with the property they own. They can change or build out a property as suits their use instead of waiting for a landlord’s permission for something as simple as a new coat of paint. Owners can even file for a change of zoning if necessary — something a landlord may not take the time to complete.
2. Equity building
Business owners might only consider equity building in terms of their actual business, but owning property is another great way to invest in the future of their company. As with real estate investors, business owners can use the equity in an owned property to add locations and expand the business when it’s time. This means that they won’t need to rely heavily on savings or future profits to grow their business.
Owning a property also means that it’s easier to get financing, as the property can be collateral against a loan. A company can also borrow against the equity of the property — something that isn’t possible if it’s leased.
3. Tax breaks
Many cities and localities offer significant tax breaks to business owners who commit to renovating properties and injecting new life into areas that are experiencing a downturn. They may also provide dollar-for-dollar bonuses for job creation or other types of targeted community involvement.
Consider Amazon, a global company that enjoyed nearly $700 million in tax benefits in 2021, including abatement and subsidies. Amazon builds in communities that offer the best deals, and reaps the rewards of ownership. To increase profits even further, Amazon has committed to owning more of its warehouse facilities, which offers considerable flexibility and savings over future years.
4. More options to cover losses
Not turning a profit? Business owners can take a tax deduction for this, too, but those who own their property have another significant advantage. If you own the building or property where your business operates and decide to shut down, you can lease it to tenants or sell it to recoup some of your losses.
4 Cons of Owning Your Property
Despite the perks of property ownership, there are times when leasing a property makes more sense for business owners.
1. Less flexibility
The main downside of owning a property instead of leasing is the lack of flexibility. Business owners who lease have the option to leave a property once their term is up — and can even break a lease if absolutely necessary.
But those who own a property cannot simply move out. And some municipalities are beginning to charge fees and fines to absentee owners who allow properties to disintegrate from lack of use.
Financial flexibility is an issue, too. Owning a property means business owners have money tied up in an asset that cannot be easily liquidated. Lessees (i.e., renters) can keep their cash liquid and can move with more agility if the market shifts.
Down payments, closing costs, maintenance: these are the costs of ownership, and they can be high. For small businesses, these can be prohibitive. Startup costs for the business itself might make it impossible to come up with enough money to launch the business and purchase a property.
Business owners who lease don’t have to worry about scraping together enough money to come to closing. All they need is a required security deposit, and they get the keys.
3. Wrong phase of the business
If you are in the “building” phase of your business or are new to an area and unsure of where to set up shop, ownership may not be the route for you.
A good broker can guide you through the rental process in a new market if you need to rent something quickly. In most cases, this same real estate agent can help you find a permanent location once you have your feet on the ground and your business up and running.
4. Relocation Challenges
Business owners expanding to a new state might understandably be hesitant to take on a big risk right away. Those concerned about how much property they can handle won’t want to overcommit to a subprime area or a property that isn’t a good match. Leasing first can give them a better sense of the new location without committing long term.
Leasing while relocating is also a good option if you don’t think the move will be permanent. For example, if your business is located in an area that has been hit by a natural disaster, you might choose to lease in a different area while your permanent location is rebuilt.
The Bottom Line: Consider Your Options
Starting or expanding a business is challenging, and it’s important to consider whether it’s worth owning the property you work out of. In some cases, the choice between leasing and owning is not clear. If leasing is not a good fit, but ownership is not a possibility right away, consider seeking out lease-to-own opportunities or short-term sublets.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.