Whether to buy or lease a home is a no-brainer for most. So why is that when it comes to our business most of us choose to lease?
Here is my answer to that question; most have not been educated on the process of buying commercial real estate.
Here are a few examples to prove my point.
Example 1:
As small business owners, we are at times intimidated by the "Bankers" who sit behind a desk and review our financial situation with a magnifying glass, only to hear those dreadful words, "We do not have a taste for this property". True story. Two-weeks ago I submitted two different loan packages to Lender A and Lender B. One was a hair salon and the other a banquet hall. Lender A did not have a taste for the hair salon but quickly approved the banquet hall. Lender B did not have a taste for the banquet hall but quickly approved the hair salon. Every lenders taste is different!!
Example 2:
Perhaps a friend told you that he tried to purchase a restaurant but was turned down flat. What your friend failed to mention is that he has NO restaurant experience. In fact, when asked what his restaurant experience was, he belted with confidence, "Well, I've eaten at a lot of em". Let's face it. Lenders are not willing to lend to someone who has no experience in the industry of interest. Industry experience is a must. Ensure you have the experience personally, or partner with someone who does.
Here are a few pros and cons to leasing commercial property.
LEASING BENEFITS:
- Credit ratings are not as crucial compared to buying.
- No long term commitment to your current location.
- Your monthly rent is a tax deduction as a business expense.
- You have the freedom to move at the expiration of the lease.
- You have the freedom to sublease.
LEASING DISADVANTAGES:
- Rental rates typically increase each year.
- No equity buildup.
- You may HAVE to move at the end of the lease if owner does not wish to renew your lease.
Here are a few pros and cons to buying commercial property.
BUYING BENEFITS
- Interest on the mortgage loan is tax deductible.
- Changes can be made to the building to accommodate your business.
- You can take annual depreciation deductions on taxes.
- No rent increases.
- You can benefit if you sell when the market is good.
- You can lease out unused space to offset monthly expenses.
- You can stay at that location as long as you wish.
BUYING DISADVANTAGES
- Usually requires 10% -20% of the sales price for down payment.
- Owning real estate subjects the owner to various legal and regulatory risks not associated with leasing.
- Requires owners to invest time and energy in property maintenanceand upkeep.
While the decision to buy or lease may seem difficult and overwhelming, there is help. The first step is to receive advice from a commercial real estate professional who knows the business and the market. Getting advice and assistance from a commercial real estate professional who is involved in the business day in and day out can significantly improve your chances that you will end up in the perfect space at the right price. Many of the lease vs. buy factors can only be decided by you, but having a helping hand will help ease a lot of the anxiety.
Written by Erica Parker, President, Commercial Lending Solutions - a company committed to educating the buyer on each step of the commercial mortgage process as well as assuring their clients get the best rates and loan options available through their direct access to top national and local lenders. For more information and upcoming seminar dates, contact Erica Parker at (678) 384-0164 or visit them on the web at www.clsga.com
