Are you currently debating between owning vs. leasing space for your service contracting business? If so, the answer is simpler than you might think: Purchasing the real estate will likely prove to be more financially beneficial when the time finally comes to retire. Below are five key advantages to purchasing a space rather than leasing it.
1.) Long-term investment
When you combine business ownership with property ownership, you are investing in your own long-term wealth. While property values are not as low as they were a few years ago, it is safe to assume that they will continue to rise or hold their value. As you pay down your loan, you are building equity and net worth. By diligently growing your contracting business, you will be able to sell both the business and real estate when it comes time to retire. Alternatively, you could opt to sell just the business and lease the property, allowing for a source of income during retirement. Building equity now will have long-term benefits in the future.
2.) Tax benefits
Real estate property owners enjoy tax advantages unique to ownership, including depreciation allowances and mortgage interest deductions. This deduction reduces overall taxable income, improving cash flow that you can turn around and reinvest into the business. Consult with a CPA or financial advisor to fully understand how a purchase could affect your tax circumstances.
When you own the property where you operate your business, you can more easily plan for long-term costs associated with that property. Without the variables associated with lease agreement renewals, it is easier to project the annual costs for the business according to your mortgage contract, insurance and estimated property tax. You can plan for the long run without having to worry about increased lease payments or a cancelled lease.
When you own the business property as well as the business, you have the control to develop, operate and modify the building to your needs as the business grows. As a property owner, you aren’t at the mercy of the landlord’s guidelines for space modifications and can therefore adapt your building infrastructure as needed.
5.) Commitment to the community
By owning your building space, you show your community that you are there to stay. Involvement and trust in the community will go a long way with existing customers as well as with future, potential customers. Consider refreshing the space if it is an older building. If you are planning a ground-up construction project, consider the aesthetics and practical needs of your service contracting business from the very beginning of the process. Although you probably don’t receive much or any walk-in traffic from your customers, showing members of your community you are committed to them through purchasing real estate in their area is a key advantage of owning over leasing a space.
As you expand your service area, acquiring a permanent physical location in your new markets has its merits. A physical presence is practical for your staff and can potentially reduce travel time for your employees in the field, as well as provide another branding opportunity for your business by placing signage at this new location.
Once you’ve made the decision to buy rather than lease a space for your contracting business, there are several factors to keep in mind. Be sure to investigate zoning ordinances before you get too far along in the purchase process. You’ll also want to consider what makes the most sense for you: buying an existing property or going through the ground-up construction process. Each option can offer benefits and challenges.
Purchasing commercial real estate has its advantages, and you will want to know how much you can afford before making any moves. Based on the historical financials and the business’s cash flow, the lender will determine what your shop can support. Working with a lender experienced in business loans for service contractors will help the lending process run smoothly.
If you are interested in financing a ground-up construction project, the loan amount will include the cost of the real estate, design and build. In addition, soft costs such as appraisal reports, surveys, permits, fees, title, EPA reports, supervision fees, construction interest carry allocation and working capital will be included in the loan proceeds. Also, remember to consider funds for new equipment and unexpected change orders. Knowing the maximum dollar amount you qualify for will allow you to plan your project accordingly from the very beginning of the process.
Purchasing the real estate for a business is an expensive investment. However, if the property is suitable for your business and can support long-term growth without overtaxing your current cash flow, it can provide a solid foundation on which to build your business and future.
New service contracting businesses may benefit from leasing, because you are provided the flexibility to move and grow. In general, it costs far less upfront to lease commercial space when compared to a real estate investment. For new business owners, lease agreements free you from some of the responsibilities associated with property ownership, such as on-site maintenance. However, with lease agreements, you are not investing in your own future. Owners of established businesses should weigh the pros and cons of owning versus leasing a space before making any decisions.
Let our team at Live Oak Bank develop a custom loan package to meet your needs. For more information about business financing for service contractors, visit our website or contact Brandon Bolen by phone at 910.550.2858 or via email at firstname.lastname@example.org. To access additional resources, visit our Resource Center.