Buying Commercial Property vs Leasing: What’s Best for your Small Business?

Should you buy commercial property or lease space for your small business? This is a big decision that all business owners face. With the right loan, you can own your business’s property rather than lease it and gain tremendous benefits. In many cases, the monthly payment is comparable to current rent and maybe even less!

If you’re considering buying commercial property, here’s how it can help you grow your business.

Why you should consider buying commercial property for your small business

There are many benefits to owning the property where your business is located. For one, you’ll have total control over the look and feel of your space without having to ask a landlord for permission. Here are a few more bonuses to becoming a property owner:

  1. You gain stability in your business: In a leasing situation, your landlord could force you to relocate your business if they sell the building or don’t renew your lease. When you own your property, you can cross that concern off your list! With the right business loan, you can lock in your monthly payment for up to 25 years. That means you can plan more effectively now and for the long term.
  2. You’ll build equity and improve your bottom line, not someone else’s: When you lease commercial space, any improvements you make stay with the building whether or not your business stays there. In essence, you’re only benefiting your landlord. When you buy commercial real estate, the time and money that you invest in improvements increase your property’s value. You’ll also gain the rewards if you leverage the property for additional business capital or if you sell it down the line.
  3. You can gain additional revenue streams if your property includes leasable space: If your property includes additional space that you’re not using for your business, you can lease it out to offset your monthly mortgage payment. Additionally, once your mortgage is paid off, the property can provide additional revenue that can help you continue to grow your business or even provide retirement income.
  4. You reap the benefits if your property increases in value: Historically, real estate is one of the most reliable ways to increase wealth and hedge against inflation. When your property value goes up, it gives you an even stronger asset to leverage.
  5. You can gain numerous tax benefits as a commercial property owner: Ask your CPA or accountant about the many tax benefits of owning your commercial property. In many cases, they can help you significantly offset your mortgage, maintenance, and other costs.

Buying commercial property can be more affordable than you think

Are you hesitant to explore buying your commercial property because you think you can’t afford it? Then you may be happy to learn that there are affordable loan options available.

For example, the SBA 504 loan is a terrific option for small businesses. The program offers a low, fixed-interest rate with loan terms up to 25 years. For context, most commercial real estate loans offer a fixed rate for only the first five or ten years of the loan term. After that, you may need to refinance the remaining balance, possibly at a higher rate.

The SBA 504 loan gives you a lower monthly payment than a conventional commercial mortgage. With that extra cash in hand, you can reinvest in your business or build cash reserves. What might your monthly payment look like? Here’s some information that can help you calculate what your monthly mortgage payment amount would be based on your current rent. The mortgage payments listed below assume an interest rate of 5.5% over a 25-year loan:

Current monthly rentEstimated mortgage loanApprox. mortgage payment
$1,000$165,000$1,013
$2,000$325,000$1,995
$3,000$490,000$3,009
$4,000$650,000$3,991
$5,000$815,000$5,004
$6,000$980,000$6,018
$7,000$1,140,000$7,000
$8,000$1,300,000$7,983
$9,000$1,465,000$8,996
$10,000$1,630,000$10,009
$12,500$2,035,000$12,496
$15,000$2,450,000$15,045
$17,500$2,850,000$17,501
$20,000$3,260,000$20,019
$25,000$4,075,000$25,024
$30,000$5,000,000$30,704

What can you do with an SBA 504 loan?

Buying commercial property is a great use of an SBA 504 loan. You can use it to purchase owner-occupied commercial real estate, such as an office building, manufacturing facility, warehouse, storefront, and more. You can also use an SBA 504 loan for:

  • Purchasing land and constructing a new building for your business
  • Business construction costs to renovate or improve your existing property
  • Purchasing stand-alone machinery or equipment with a useful life of at least 10 years. You can also include the purchase of machinery and equipment as part of the building acquisition

To use an SBA 504 loan, your business must occupy at least 51% of the commercial property. If you’re using the loan for a new construction project, you must immediately occupy 60% and expand to 80% within three years. Any additional space can be rented to other tenants to gain income, or you can use that space for yourself. For example, Moriarty Meats uses the majority of the space of their building for their business operations and live in the apartment that’s part of the property.

Overcoming the down-payment barrier with the right loan

If you’ve explored buying your commercial property, then you know that most lenders typically require 20-30% or more for a down payment. That’s a significant amount of money, and the SBA 504 loan program may be the solution you need to get over that hurdle.

In most cases, the down-payment requirement for a 504 loan is only 10% and the SBA offers many ways for you to meet that requirement including, but not limited to:

  • Your personal savings
  • Business cash or reserves
  • A gift from a family member that doesn’t have to be repaid
  • Investments that you’ve already made in your business that are related to your real estate project
  • A home equity loan or line of credit (some restrictions apply)

When you apply for an SBA 504 loan, your loan officer can help you figure out an owner-equity plan that works for you.

Talk to Pursuit about loan options for buying commercial property

Every day, Pursuit helps small business owners like you in New York, New Jersey and Pennsylvania get the financing they need to launch, grow and succeed. If you’re interested in learning more, contact us today to find out about how we can help your business. With more than 15 loan options available, Pursuit is here to support your success.

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