Should you Rent or Buy Commercial Real Estate? 5 Questions for Business Owners to Ask Themselves
Published July 5, 2022 • 3 Min Read
The decision whether to buy or rent your commercial space largely depends on factors unique to your business. Here are 5 questions to ask yourself as you determine what’s best for your company.
1. Do you have available cash to use towards a down payment?
Typically, commercial mortgages require a larger down payment compared to residential mortgages. Before making the decision to buy, it’s important to determine if you have the lump sum cash required to make the purchase.
“Along with a down payment of at least 25%, owners need to factor in the upfront out-of-pocket that are incurred with purchasing property, including appraisal fees, legal fees, and real estate fees,” says Joanne Ironside, Business Account Manager at RBC.
2. How do the monthly payments stack up?
If the mortgage payments on your ideal space are going to be significantly higher than your lease payments, you’ll want to ensure your business’ cash flow can support this increased commitment over the long term.
3. Is there flexibility in location?
How vital is the location to the success of your business? For instance, could you move your space to a different area to take advantage of better prices? Alternatively, if having an established brick-and-mortar location is important to the success and sustainability of your business, then it may make sense to buy as you gain more long-term control over your location.
4. Can your monthly cash flow cover the costs of ownership?
As with homeownership, there are upkeep costs that come with owning property. Consider expenses such as property taxes, utilities, maintenance and repairs you would be responsible for as an owner — but likely not see as a tenant. On top of that, unlike residential real estate, commercial real estate typically has a longer sales cycle. This means your cash flow will need to cover several months of mortgage payments while trying to sell, whether you have closed your business or moved to a different location.
5. What does your future workplace look like?
Given the many shifts that happened over the past few years (working from home, online shopping), it will be important to understand the changing trends within your industry to assess the long-term needs of your physical workplace. For example, if you think you may be experiencing significant expansion or will be pivoting the way you do business, you may want to consider leasing for the time being, given a commercial mortgage comes with some fees (legal costs, appraisal, setup fee, etc.).
These added costs may not be worth it if you’ll need to find another new space in a few years. On the other hand, if you’ve already experienced the change you expect will last long-term, and your cash flow can support a mortgage, then this may be a good time to consider investing in real estate for your business.
Bottom Line
The decision to lease or buy your commercial property comes down to your current and prospective financial picture, the trends of your industry and the vision you have for your business. An Account Manager can help you determine the best option for you and work with you to create a plan to help you get there.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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