Is it better for my business to buy or lease real estate? (Lawrence, Illinois)
There is no easy answer when it comes to real estate. There are a variety of factors that must be considered for your business. This article deals with some of the issues to consider when making a decision.
Buying real estate necessitates a much greater capital investment than leasing. A building that costs $250,000 to buy might only cost $2000 a month to rent but would likely require a down payment of over $60,000. Buying a building also involves hiring an appraiser, loan fees and building inspections; none of which is cheap. Many companies simply lacking the funds required to buy the building they operating in.
Calculating whether or not it is worth it to buy real estate is not as simple figuring out what the out of pocket costs are. Any investment has an opportunity cost. The opportunity cost when buying real estate is the potential return on investment that could be gained from other investments. The opportunity cost of buying real estate must be examined very closely because investing in real estate means forgoing returns that could come from securities and bonds.
Fixed or Variable costs:
Buying real estate is great for stabilizing company overhead. A longterm fixed interest rate loan means a business can predict what the shortterm and longterm costs will be for maintaining their facilities. Leases expire and can be subject to market forces. Many leases also have provisions that allow the landlord to raise rents as inflation goes up.
It can be hard to find the right size building for a business because it difficult to predict how much a business will grow. If a company grows out of its space then it will be forced to buy or lease more property. Sometimes it easier to lease rather than buy in these situations because a lease can be terminated, real estate that is owned would need to be sold.
Businesses can fully deduct the cost the full cost of renting their space. Owners of investment properties can normally write off the cost of repairing their property and the interest they pay to service their loan. However, upgrades of commercial real estate must be deducted over the course of 39 years. Companies that own real estate are responsible for paying property taxes; rental properties usually include property taxes in the lease agreement.