When you’re starting a business, or need a new building to operate your growing New York business from, one of the first decisions you’ll need to make is whether you should buy or lease commercial real estate. There are pros and cons of each option to consider. Here’s what you need to know to make your decision.
How Long Will You Stay at the Location?
One of the most important financial factors in deciding whether to buy or lease commercial real estate in New York City is how long you will remain in the building. If you’re planning to stay at your business location for more than seven years, buying is most likely going to be less expensive than leasing. It’s also important to remember if you remain in the building long enough to pay off the mortgage, you own it outright with no further monthly payments required. For businesses still in operation, this reduces your overhead expenses. You can also make money by selling the building when you decide to close the business or move to a new location. On the other hand, if you think your business will outgrow the location and need to move within seven years, leasing is probably the better option.
Do You Have Sufficient Upfront Cash Flow?
When you buy commercial real estate, you need much more money upfront than you need when you lease. Commercial real estate mortgages typically require 20% down to get the mortgage, in addition to the closing costs. When leasing, a landlord will often only require a security deposit equal to the first month’s rent. If you don’t have the cash flow to support such a hefty out of pocket expense to get started, you may have to lease. Also, even if you do have the money available to make the down payment and cover the closing costs, it’s possible that money would be better spent investing in the growth of your business.
Ongoing Maintenance Concerns
Buying commercial real estate presents new responsibilities for your business. When the building is yours, you’ll need to properly maintain it from top to bottom, inside and out. This is an added expense and a potential hassle that could get in the way of your ability to grow your business. In addition, there is the added expense of property taxes you must pay on a commercial property you own that is not required when you lease (because it is the responsibility of the landlord). When you lease, the landlord must handle the maintenance needs of the building and property, giving you more time (and money) to focus on your business.
Business Tax Savings
When buying commercial real estate, you can deduct the amount of your mortgage interest expense from your taxes. When leasing, you can almost always deduct the full amount of your lease as a business expense, which offers long-term benefits at tax time.