One of the bigger decisions faced by most business owners is whether or not to purchase or lease their place of business. There are advantages and disadvantages associated with both, and the decision requires a lot of analysis and planning. Here are some key considerations to help you determine if owning the building that your business operates from may be right for you:
Control
The biggest non-financial consideration when deciding to purchase a commercial building is control. With no landlord limitations or restrictions to deal with and no lease to abide by, owning gives you much more control. It can be about controlling your location, controlling your ability to expand or contract, and/or controlling your ability to maintain a consistent presence in the community. For us, it was really about location, and reconnecting with the community of Streetsville, where our firm was founded in 1987.
Diversification in the long-run
Another point in favor of purchasing is that it spreads your investments across a wider range of assets. Our entrepreneurial clients often view purchasing their operating building as a great diversification tool. While there are no guarantees, commercial real estate has been a solid investment in the GTA since the early 90s, and owning can build wealth separate and apart from your operating company. You are largely exchanging a payment on an operating lease for a debt repayment that will build equity over time as you pay down the mortgage and the value of real estate goes up. With the assumption of continued low interest rates and market appreciation, owning becomes almost a forced savings over the long term. We have seen clients make more money owning real estate than they ever did running their operating business, and with relatively fewer headaches!
Note: we haven’t really seen real estate prices go down in the GTA for over 30 years but that’s not necessarily sustainable. There is always the possibility that rising interest rates and/or a market correction may make a commercial real estate investment less profitable in the long run.
Income opportunity
Depending on the building, owning may also provide an opportunity to earn income. By leasing part of your owned space, you can become a landlord and have other tenants pay you rent. There is an implied tax benefit to doing this as a lot of your rental income stream will shielded by the depreciation on your building. Another benefit of leasing space to other commercial tenants is the stable cash flow, as a commercial lease can easily extend to 5 years and beyond.
Note: as a landlord, you also have all the responsibility and associated costs of maintaining the property. If the roof leaks, if there’s a plumbing issue, if the HVAC needs to be repaired or replaced – it’s your problem. These maintenance costs, in addition to your mortgage, property tax, insurance, security and other expenses associated with commercial building ownership can create a constant drain on your finances that you need to be properly prepared for.
S+C Partners is committed to helping you
There are many benefits to owning your operation’s home base, but they can come at a cost. Buying a building is a long-term investment. If your business needs are unstable, or you don’t have enough capital to get started, you may be better off leasing for the time being.
Before you buy, it is crucial that you have a solid understanding of all possible risks, and ensure your business will have the necessary resources and cash flow to support the purchase in the years to come. Our dedicated team is here to support you. Please call us at 905-821-9215 or email us at info@scpllp.com if you have any questions or require any assistance.