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December 15, 2018

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City National Bank

Should your business lease or buy its office space?

City National Bank business real estate native

For many business owners, the decision to lease or buy office space can be a difficult one.

Though leasing requires less overhead and can be a quicker option for growing businesses, the benefits of buying are considerable. “I almost always recommend buying when possible, or at least working toward that goal,” said Bruce Ford, senior vice president and Nevada regional banking manager at City National Bank. “From our research, it appears that it’s especially favorable to own right now because of the current economic conditions.”

Investing in property for your business can have many rewards—including diversifying your portfolio, decreasing your costs and increasing your profits.

 

Why now is a good time to buy

Real estate transactions can feel nerve-wracking, but being knowledgeable and reasonable about the market is necessary. “One of the most common pitfalls I see is people trying to time the market,” Ford said. “Typically, the best time to do something is now—especially if you’re seeing the trends that we are currently. Don’t wait for interest rates to go down. The environment appears to be right now.”

Interest rates and land prices are rising, as are rent costs. Ford notes that interest rates are expected to go up once more this year and twice next year. “In the last month, the 10-year Treasury note has gone up 16 basis points. Since January, it’s 60 basis points,” Ford said. Though the payment differential may seem minor on monthly payments, it can be a fortune during the course of the loan.

For example, if you put 25 percent down on a property that costs $750,000, financing $562,500, and the payment differential is $203 per month, it will amount to $160,000 during the 25-year life of the loan.

“Even though interest rates are going up, it’s still a good time to buy real estate. Rates are historically low, and buying gives you an advantage over competitors that are renting,” Ford said.

 

Benefits of owning your office space

Beyond access to specialized loan programs, owning your office space can come with many benefits, including:

• Fixed expenses: While many business costs are subject to price fluctuations, you can have peace of mind knowing that your monthly property costs will remain the same. Even if you hold a long-term lease, the landlord can change the terms and raise rent once the lease period ends, which could force your company out unexpectedly.

• Tax benefits: Owning offers several tax benefits, including being able to write off expenses as the property value increases. Unlike renting, if you own your commercial property, you will be able to claim deductions on associated costs and expenses, such as interest payments and property taxes. There are also other tax strategies you may be able to take advantage of.

• Equity: Owning a commercial property is a long-term asset for your portfolio that allows you to build equity and credit. For business owners, equity affords freedom and fluidity of funds because the equity can be leveraged if needed. Equity can also increase the credit worthiness of your business, making it easier to qualify for loans that can facilitate company growth in the long term.

 

Types of commercial real estate loans

Loan programs offered for commercial properties are different from those offered on residences. Similar to homeownership, a conventional program requires a 20 percent down payment, but business owners should look into alternatives as well. “The SBA 504 loan program can be great for eligible businesses because it allows you to put 10 percent down at a fixed interest rate,” Ford said. He also noted that unlike homeowners who put less that 20 percent down, borrowers using the SBA 504 program won’t be required to pay PMI insurance.

 

Should all business owners try to buy their office space?

While owning is always preferable, business owners need to be smart when buying. “Live within your means and don’t strain cash flow excessively. If buying will significantly affect operations, continue to lease until you’re in a better position to buy,” Ford said.

 

Real estate advice for business owners

If you’re considering a real estate investment for your business, consult your business adviser. He or she should be able to outline the possible risks and rewards, and help set reasonable goals customized for your business. Every business has different needs and considerations, so you need to be sure you’re working with someone who understands that.