When it comes to owning or renting business real estate weigh the costs and benefits before making an investment
There are pluses and minuses to examine when considering owning vs. renting business real estate.
Here are three primary considerations:
- Many business owners consider investing in real estate to save on the cost of rent and even potentially open up a new revenue streams.
- Cash savings could be found in lower monthly costs, subleases to tenants, and depreciation.
- But remember to factor in costs such as maintenance, property taxes, utilities, time spent managing the property, etc.
Paying the monthly rent can be a massive expense for any business, and many business owners wonder if they could be saving their business money (or even earning a profit) by owning their own space instead of leasing. For some companies, real estate investment can be a smart move, but only if the costs and benefits are weighed carefully and considered from every angle.
The first consideration:
The first key consideration is the true cash savings afforded to the business.
- How much is your company currently spending on real estate? Is it possible to purchase a space at a lower monthly cost than it is to rent?
- If not, is it possible to sublease part of the space to other tenants to make up the additional cost?
From an accounting and tax perspective, real estate ownership offers the advantage of writing off depreciation on an asset that could be increasing in value every year. And of course, there are the intangibles: many times business owners associate a certain pride with owning their own real estate.
Potential savings and direct and indirect costs
The potential for savings or other benefits may be there, but dont forget to also consider both direct and indirect costs associated with owning a property.
How much will the company have to spend on maintenance, taxes, and utilities, especially those utilities that may have been previously included in the cost of rent?
Will considerable time be taken away from the business to manage the real estate? (Might the firm even need to hire a property management company, or possibly a new employee to oversee this aspect of the business?)
And most importantly, would the money invested in the real estate be better spent in the business to optimize sales, operational, or financial flow?
There are many factors to consider before investing in real estate. Before making a purchase, talk to your real estate and accounting professionals to be sure you understand the true costs and savings, and ensure a financially sound decision.
Another article on renting vs. buying:
Lease Or Buy Space?
About the author
Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.Website