Perhaps you have a great idea for a new business that requires a warehouse. Or maybe you already have a successful business and have been leasing a warehouse for several years. With either scenario, you’ve likely considered whether leasing or buying a facility is the best route to take. How do you decide?
While you should most definitely seek legal and accounting advice, here are some questions to consider before we look at some pros and cons of each option.
Do you use equipment that can be easily moved?
What is your potential for future expansion?
What is your ability to obtain capital or loans?
Where do you want to invest your limited capital?
Advantages of Purchasing
Commercial property owners can usually deduct depreciation mortgage interest expenses as well as write off maintenance, repairs, taxes, etc.
More Fixed Costs
Unlike with long term leases that have rent increases, a fixed rate mortgage will insure that most of your monthly payment remains consistent over time.
Additional Income Potential
If your facility has more apace than you initially need, you can lease to other companies, generating income to offset mortgage costs.
As the value of your property increases over time, so will your company’s capital evaluation. Or if you sell when the property value is higher, you’ll realize that gain as income.
Equity can often be used as leverage for obtaining loans and other business dealings.
As the owner, you are in total control of your property; you get to make the decisions about your property improvements and enhancements.
Disadvantages of Purchasing
Higher Upfront Costs
Buying will cost more – substantially more – upfront. Consider if the money used for the down-payment and other upfront costs would be better spent if you invest it in growing your business.
The prevailing reason that businesses fail is insufficient capital. If you drain your capital to purchase a facility, you could find your self in the not-so-desireable position of being unable to take advantage of new opportunities for growth, or worse, to meet current business obligations.
Yearly Cost Increases
Property taxes and insurance costs will likely rise each year which can have a negative impact on your cash flow.
Risk of Capital Losses
Should you find yourself needing to sell the property prematurely, there is the possibility of having to sell for less than the original purchase price.
Maintenance and Improvements
Maintaining a property is an added hassle and expense. Do you have the extra time and resources to manage your commercial real estate investment?
Advantages of Leasing
Usually there are more commercial facilities available for lease than for sale, thereby increasing your options for location, size, amenities, etc.
Lease payments are a business expense that will reduce your taxable income. You can generally deduct all costs associated with leasing.
Money not tied up in a commercial real estate down-payment (usually about 35% of the purchase price) can be used elsewhere in the business, allowing you to take advantage of new opportunities to grow your business.
Managing a commercial property can be a real time drain. Leasing may provide you with more time to focus on running your business, as well as allowing for you more personal or leisure time.
Faster and Easier to Move
If you outgrow your facility sooner than expected, it may be faster and easier to move, especially if you have the ability to sublet.
Disadvantages of Leasing
Typically, commercial leases are subject to annual rent increases as well as increased costs when the lease is renewed
You have little control over the property owner’s decisions. If the landlord decides to sell the property or declines to renew your lease, you could be forced to relocate.
If you don’t own the building, you have no equity in it, and therefore, no capital benefit for your company.
If your business grows, and you need more space, it’s more difficult, if not impossible, to expand a leased facility.
Whether you lease or own your warehouse, know that Next Level takes engineering and design seriously, beyond what it takes to produce a well-designed and reliable product. Our offerings include basic selective pallet rack to complicated, automated, and engineered systems projects. Next Level engineers have installed systems all over the country, for a variety of industries. Our experience, especially in using innovative technologies, is what sets us apart.