Should You Rent or Buy Your Small Business Location? Pros and Cons

One of the biggest decisions facing entrepreneurs launching a new small business is determining whether to rent or buy commercial real estate for their operations. Should you lease office or retail space? Or take the plunge and purchase your own building?

There are pros and cons to each option that warrant consideration. Weighing the benefits against the potential drawbacks will help you make the right choice for your particular situation. In this post, let’s explore the key factors when deciding whether to rent or buy property for your startup.

Upfront Costs

One major difference between renting and buying is the upfront cost and financial commitment. Renting simply requires paying the first month’s rent plus a security deposit. Buying, on the other hand, means putting a substantial amount down upfront, often 20-30%.

If securing a business loan, you’ll also have fees for things like lending applications, appraisals, and credit checks. Buying also comes with closing costs and potential broker commissions. And if the space needs renovations, that’s another big upfront investment.

Overall, renting requires less cash to get started. Buying demands major capital right off the bat between the down payment, closing costs, and potential build outs.

Monthly Expenses

Ongoing monthly costs also diverge when renting or buying. Renting comes with a predictable, fixed monthly lease payment that includes maintenance and repairs. Owning means paying a mortgage, property taxes, and additional maintenance costs that may fluctuate.

However, one advantage of buying is the mortgage principal portion of payments help build equity in the property over time. Part of the payment goes toward ownership rather than disappearing into a landlord’s pockets.

Maintenance responsibilities vary as well. As a renter, the landlord handles any building upkeep, which provides peace of mind. Owners take on all maintenance duties and costs directly.

Flexibility

Renting offers more flexibility if your business has potential to relocate or expand. Short term leases are readily available, allowing you to pivot locations relatively quickly if needed. Buying commercial property represents a long-term commitment.

If you end up needing or wanting to move after purchasing, you either have to rent out or sell the building you own. This may limit flexibility for startups still establishing their ideal operations.

With rented spaces, you can also typically expand to adjacent units or floors more easily within the same property. Buying gives flexibility for renovations, but expanding footprint may require purchasing additional real estate.

Customization

Renting does limit your ability to customize the space to your preferences. Any permanent changes or renovations require landlord approval. With purchased property, you have full autonomy to remodeling and build outs.

That said, many commercial leases will include allowances for certain basic improvements like painting, flooring and lighting. You have more design freedom when owning the space but can still achieve minor customizations when renting.

Financial Benefits

From a financial perspective, purchasing commercial real estate that appreciates in value over time provides an asset and equity. As you pay down the mortgage principal, you build ownership interest.

Owning also comes with tax deductions for expenses like mortgage interest, property taxes, insurance, maintenance and repairs. However, any gains are taxable if/when you eventually sell.

Renting represents a fixed operating expense without building equity or tax benefits. But some lease agreements can be structured for deductibility. The advantage is less financial risk and commitment.

Carefully Determine the Best Option

Analyze your business’s current and projected budget, space needs, location goals, and other factors. If wanting to establish long-term roots and you can swing the down payment, buying may be the better path forward.

Other situations may make renting the more prudent choice. Weigh the relative benefits over both the short and long term for your specific small business.

With good planning, you can make an informed decision on whether to rent vs buy your first commercial location and set your startup up for success.