Is it better to buy or rent a commercial property for your business?
While the owners of new boutiques have more pressing matters on their minds, at some point the question of buying vs. renting will come up.
There are advantages and disadvantages to each option.
You are committing less money to your business when you rent than when you buy a building.
On the other hand, when you buy a property for your store, you are in effect acquiring an asset that you can later on sell.
If your business has short term goals, such as generating the highest possible income in a relatively short period of time, then you will want to rent. By renting you are spending less money than you would spend when you take out a commercial mortgage to buy a property.
If your business has long term goals, such as building a valuable asset that can be sold in the future, then you will want to consider purchasing a property.
The cost of purchasing a property is much higher than the cost of renting a property, primarily because buying requires a downpayment of anywhere from 10 to 30% of the total price.
When you rent a property, you will need to pay upfront one or two months as a deposit, but you might receive a free month of rent. Renting requires a much smaller outlay of capital, especially if you are renting month to month.
An important reason for renting is the unknown future success of your store. While the future is always uncertain, unfortunately, 80% of brand new businesses fail.
A retailer who has been in business for many years will have an existing customer base, plus the necessary experience to help her weather the ups and downs of doing business. A retailer with years of growth has a much better chance of continuing to succeed as compared to a newcomer.
Because established businesses have a much better chance of succeeding, it makes more sense for an established boutique to purchase the space that it is occupying.
One risk that is associated with renting space is that the landlord can increase the rent, or even worse, decide not to continue renting out the space.
I know of many businesses in New York that had to close because the landlords decided to use the space for another purpose.
Sometimes a landlord will decide to convert a commercial space into a residential space, effectively requiring the store to find another location. If the store owner cannot afford the rent at another location, or cannot find another location, then he will have to close his store.
Having a good long term lease can help prevent a retailer from losing his space.
One of the best benefits of owning your own building is that you can always close your shop, and rent out the space to another business. For instance, the owners of Kosher Delight, a fast food restaurant in Brooklyn, decided to close their business, and rent out the space to a bank.
You can also start out by renting your space and when the time is right, you can purchase the building in which you are renting space.
My grandfather, Meyer Lowy, had a bakery in Brooklyn called Chiffon's. His landlord offered to sell him the building he was renting space in.
After some further encouragement from the landlord, my grandfather decided to buy the building. In addition to operating the bakery, he was able to rent out space in the building.
Ultimately, you need to sit down with your accountant and have a good look at the numbers.
Keep in mind that the question of buying vs. renting highly depends on your local real estate market and on your finances.
For instance, years ago the neighborhood of Greenpoint, in Brooklyn NY, became very popular. Due to the rising popularity of the neighborhood, commercial rents shot up. In hindsight, retailers would have been better off buying the properties that they had been renting.
I know both owners and renters that have been very successful, and the opposite as well. So at the end of the day, we need God's help, and some great business sense.