When you are about to start a brick-and-mortar business, you have three options for securing a commercial space. You can buy one, take out a lease, or erect the building from scratch. Obviously, all of these options have stark differences from each other. To help you make the best decision for your investment, here are the pros and cons of each choice.
Building a commercial space
Advantages
- Flexibility and customizability. If your business has specific structural and spatial needs to run smoothly, building your own commercial space with the right general contractor is probably the right choice. This is especially true if you are eyeing a specific location but cannot find a building therein that suits your needs perfectly.
- Sub-lease potential. Erecting a building that is larger than what you currently need can provide you with sub-leasing potential in the future, which, of course, comes with additional income. Furthermore, real estate is likely to increase in value over time, meaning you can get a high return on your investment when you decide to sell your property in the future.
- Tax benefits. You may receive potential tax benefits if your building contributes to job growth within your local community. To determine if there are tax incentives and potential cost-savings that you will be eligible for if you build a facility from scratch, consult your local department of economic development.
Disadvantages
- There is no denying that erecting a building from scratch is often more expensive than renting or buying. With this option, you will have to pay for architectural design fees, building permits, utility installations, among a multitude of other costs on top of the actual building costs.
- Downtime. Depending on the size and complexity of your building, it can take several months or even more than a year to complete it. If you don’t have time on your side, this option may not be the best one.
Buying a commercial space
Advantages
- Lower financing costs. Recently, mortgage interest rates have been hitting all-time lows, both for residential and commercial properties. Buying a building for your business can therefore provide you with lower financing costs in the long run and give you ownership equity as opposed to renting from a landlord.
- Stable overhead. When you own the building, fluctuating mortgage rates will have little to no effect on you (unless you have an adjustable-rate mortgage). As a result, cash flow will be more consistent, and you won’t have to worry about sudden increases in rent.
Disadvantages
- Similar to building a commercial space from scratch, it is also often costly to buy a building. Standard down payments for commercial buildings are usually at 20%. And on top of that, you will have to pay for closing costs, realtor fees, building inspection fees, and maintenance, among many others.
- Possible value decline. Real estate values do not always appreciate. If the neighborhood deteriorates or local tax rates increase, you may not the return on investment that you expect when you eventually decide to sell.
- When you own the building, you are a hundred percent responsible for the maintenance. That said, you will have to set aside an annual budget for maintenance alone, especially if you are also sub-leasing parts of your property to renters.
Renting or leasing a property
Advantages
- The cheapest option. Compared to the two options mentioned above, leasing a commercial space is usually the cheapest choice.
- When your lease ends, you have the option of moving somewhere else. As opposed to buying or building a commercial space, you have more freedom to relocate and are essentially not tied down to one location for longer than you need to be there.
- Maintenance savings. Unless you are at fault for the damage, your landlord will be responsible for the repair or replacement expenses.
Disadvantages
- Fluctuating rent. When you are renting a property, there is always a risk of having your rent increase due to changes in market values. Landlords typically give advanced notices before imposing increases in rent, but even then, the leeway may not be enough to keep your cash flow in check.
- No equity. Of course, you cannot build ownership equity so long as you are renting a commercial space.
These are not the only pros and cons for each option, but they should give you valuable insights on how you should go about acquiring commercial property for your business. Whatever the case may be, you must do due diligence and perform a proper cost analysis before making any investment.
