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News, tips, and advice for small business owners

The Pros and Cons of Renting vs Buying

Posted On
4/15/2020
By
Denise Stern

Whether you are working out of the home office, a garage, or you want to launch an actual brick-and-mortar store or shop space for your small business, you will want to consider the pros and cons of renting versus buying.

A number of considerations go into any decision of renting or buying, especially for independent business owners. To make the process a little easier, we have broken down the pros and cons of each option so you can make the best decision for your small business.

Benefits come with renting and buying

Before deciding on renting vs. buying, take into consideration that both have benefits. While there are benefits to both, all small businesses are going to have different needs.  Study aspects of each that might make more sense for your goals.

Renting pro: Renters have the flexibility to close out a lease and change locations if they decide they don’t like their present location or if they want to expand.

Renting pro: Lower initial cost outlay. Renters are not typically required to pay as much upfront versus a small business owner buying a business but don’t forget about the security deposit you’ll likely have to pay.

Renting pro: Maintenance issues such as landscaping and upkeep of the building itself, from plumbing to electrical to repairs, is the responsibility of the landlord, which means more time to focus on your small business.

Buying pro: Buyers have additional flexibility when owning their own location. As long as you stay within building codes of your locality, you can do whatever you want with your building property such as expanding, upgrading, renovating, and so forth.

Buying pro: Building equity. When you own your own property, you build equity as well as benefit from increasing property values. If there comes a time that you want to leave that location, you have the option to rent out certain areas of your business or even the entire building, earning extra income.

Tips for renting small business space

When searching for rental space for your small business, follow some tips to help you make an educated decision.

  • Start small. When it comes to rentals, smaller is better when starting out. Rent costs are typically determined on square footage. Starting small will also give you the opportunity to understand how much space you truly need. If you go too large to begin, you may be paying for space you don’t utilize and end up paying more in rent and other expenses, like electric, or non-essential space.
  • Consider lease terms. When querying rental/lease requirements, opt for the duration you want. First-time small business owners may hesitate to attempt negotiations with the landlord regarding lease duration, but shorter might be better when getting started. For example, opt for a one-year lease rather than a 10-year lease. Start-ups should try to negotiate short leases as often as possible to give you the time to establish the business. However, successful small business owners looking to expand might opt for longer lease options so that you can lock in cheaper rent.
  • Negotiate. Depending on the health of the economy and current interest rate, always attempt to negotiate. If the landlord doesn’t budge on rent, maybe they will pick up a portion of the utility bill, or waste removal, or at the very least, landscaping or snow clearing services.
  • Vet your future landlord. Before finalizing your location, you’ll want to have some information about your future landlord. Aside from meeting with them and going over the lease agreement, you should check around and ask for references. Additionally, you can consider doing a credit or background check. Knowing and understanding the creditworthiness of landlords and/or building owners is important, especially if they’re in a financial bind.

Things to consider when buying a small business space

It’s exciting to think of renting or buying to launch or grow your business, but it’s also important to remember that often, our dreams are bigger than our budgets.

  • Evaluate cash flow. When considering your budget for the purchase of a small business, take a careful look at your liquid and fixed assets to help determine available collateral. This will also help you determine how much equity you can inject into the business from the start as well as a potential down payment. Since cash flow is one of the top worries among small business owners, it’s important to do a deep dive into your expenses and assets to understand what you truly can afford.
  • Know your current debt. Assess your other debt obligations such as home mortgage, credit card debt, student loans, and so forth. Calculate your debt-to-income ratio. Business lenders consider you a healthy borrower if your debt-to-income ratio is typically below 40%.
  • Know your business numbers. Evaluate your business’s current net income and operating costs. Divide these costs by your potential monthly loan payment to determine your debt service coverage ratio. In ideal cases, that ratio should be 1.25 or more, according to Fit Small Business.
  • Remember location, location, location. When choosing a location for your business, there is a lot of research that needs to happen. When we talked to Maria Erna, owner of WaG Premier Grooming Salon and Dog Spa, about her small business journey, she told us that she did a lot of digging into her business location. She researched foot traffic in the shopping plaza she’s located in, evaluated the businesses that would be surrounding hers, and even looked into average incomes for the area.

Other things to consider whether you’re looking to rent or buy a small business is to access and review reliable resources such as the Small Business Administration.

Bottom Line

The decision to rent or buy ultimately comes down to what makes the most sense for you and your business. Evaluate not only your finances but your ultimate goals. Most importantly, be honest with yourself. Ask other small business owners about their experiences renting or buying while keeping in mind that every business owner’s journey is different.

Before making a decision, talk to a financial advisor or your accountant to verify financial stability, determine projected expenses, and accurately track those expenses against projected revenues. Make your decision following adequate preparation, knowledge and reachable goals and expectations.

Whether you decide to rent or buy, congratulations - you’re starting on a grand adventure with your business!

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