Brad, I’m looking to move my business out of my home and into an office. My business partner suggests buying a commercial property rather than leasing a space. Is this a good move?
Good question, Doug.
Your business partner may have the right idea, but it depends on your current situation.
Many business owners consider buying rather than leasing because of the greater benefits associated with owning property. Even if a monthly mortgage payment and a monthly rental payment are the same, the impact on your net worth is substantially different because one is an asset and one is an expense.
An asset is a tangible, re-sellable item of value that you or your company owns as part of doing business. Real estate is considered a capital asset, meaning it will still have value after a year or more and is not intended for sale during the normal course of business. An expense, on the other hand, is something you spend money on to keep the business up and running. Unlike assets, expenses have no accumulating value and often include rent, utilities, office supplies, and health insurance.
When it comes to your new office space, consider what you’re paying for.
As monthly mortgage payments are made and a portion of the principal is reduced each month, your ownership value in the property grows. In addition, the longer you’re in the office, the longer you are able to amortize the closing costs over time. Unlike a lease agreement, your office is an asset that can be sold at some point in the future.
It seems as if there is no debate, yet you also have to consider a few things: overhead, cash flow, the real estate market, and the amount of time you envision being in that space. If leasing an office is cheaper than owning it, and that money can be used elsewhere in growing the business, it may be wise that the first step moving from home and “out into the world” is via leasing—especially if the property requires renovations. On top of the down payment, most properties require at least minimal improvements before it’s move-in ready. Be aware of cash flow and make sure to get additional capital improvements included in your mortgage.
You also need to consider the local real estate market. Do some research and ask questions about the direction of the market. And if this isn’t a long-term move, the value you get back from owning may not be as substantial as the near-term cost savings if you can get a good deal on a lease. Rent on a leased property is fully tax deductible, while only the interest portion of your mortgage is tax deductible.
As with any investment, information is your most valuable asset, which is why we suggest working with a trusted professional who can help you plan for taxes and walk you through ‘what-if’ scenarios.
To build wealth quickly, it’s wise to spend money on assets that maintain or grow their value rather than expenses that don’t increase net worth. If you foresee your business growing and buying is feasible—go for it!