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Should a new business rent or buy commercial space?

On Behalf of | Sep 25, 2023 | Real estate

Entrepreneurs seeking to turn their idea into a functional business and executives brought on to help develop a concept into a functional organization need to make a lot of decisions before a vision can turn into an operational reality. Choices made in the early stages of business development can affect the company’s budget and business model for years to come.

One of the most important decisions that must generally be made is where to acquire facilities and whether to rent or buy the commercial property necessary to run a business that requires its own space. Is it usually a better option for a new company to purchase real property or to rent it initially?

Every scenario inspires different considerations

The average person asked about real property investments would likely immediately claim that buying real property is always better than renting it. That oversimplified approach might lead to people making financially devastating mistakes, particularly when choosing on behalf of a business and not an individual person.

If a company has limited startup capital, it could take every last cent of those funds to acquire real property, and the loan payments every month could be a real strain on the company’s operating budget. Additionally, the possibility of something going wrong with the facility is a serious concern, as there will be no owner or landlord to help share in the repair costs. The company might need to change where it operates or scale its facilities up or down based on changes to its business model in its early years. Purchasing real property will drastically reduce the company’s flexibility and ability to adapt on the fly to changing market circumstances.

Of course, there are benefits and drawbacks to renting as well. Not all commercial rental agreements require that a landlord contribute to maintenance and repairs. Tenants may find themselves responsible for a significant portion of those costs. Additionally, the landlord could potentially terminate the lease at any time or change the least terms, thereby leaving the company unable to afford the space in the future.

The ownership of an organization will need to carefully consider what resources it currently has and what changes it will likely undergo in the first months and years of operating to determine whether renting or buying would be the better option. Ultimately, seeking legal guidance can help someone choose the right solutions based on their current position and aspirations.