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Should My Small Business Rent or Own Commercial Property?

koenig.jeffrey — Fri, 08 Oct 2021 11:00:00 +0000

North Consulting Services

Should My Small Business Rent or Own Commercial Property?

Is Renting Or Owning Commercial Property Best For My Small Business?

When finding the perfect property for your small business, there are many factors to consider. Location is of course the most crucial factor, but knowing whether to rent or buy a commercial property can be just as important. There are pros and cons to both renting and owning a commercial property, and in today’s discussion we hope to provide clarity on which option is best for your small business.

Pros Of Owning

1. Building Equity

By owning commercial real estate, you give yourself the opportunity to build equity. This means that as you pay off your mortgage, you own more of the property. Having more more equity allows you the opportunity to take out a second loan, a line of credit against the property or do a cash-out refinance. Building equity also gives you additional options for retirement. You can sell the property outright, or sell your business but retain the property, giving you the option to lease the property and maintain a steady income.

2. Tax Breaks

If you are the business owner and have purchased a property, you are able to write off all mortgage interest you paid during that tax year as a business expense. There are also a few tax deductions designed to benefit business and property owners:

IRS Tax Code Section 179: This allows deductions for equipment and furnishing purchases that are put into service the same year that they are purchased. For the past three years, Congress has granted a deduction of $500,000 which can be a significant contribution to offsetting the costs of purchasing property.
IRS Tax Code Section 1031 (1031 Exchange): Investment properties used in a trade or business can be sold and the funds applied toward the purchase of a similar or like property within 180 days of sale, without receiving any tax penalties. The purchased property must be of equal or higher value to avoid a tax penalty. This can be used for a business owner looking to move to a larger property as their business grows, without incurring any tax penalties.
Cost Segregation: This allows a business owner to have personal property assets reclassified in order to shorten the depreciation time for tax purposes, which in turn reduces current income tax obligations.

3. Appreciating Asset

Owning commercial real estate allows you to benefit from capital appreciation, which is the increase in your property’s value over time. Appreciation can be affected by inflation, supply and demand conditions, interest rates, neighborhood conditions, among other factors. Ensuring the building is maintained and up to code can help increase it’s appreciation. Real estate investors call making improvements to the building “forcing appreciation”. Consulting a local real estate expert or North Consulting Services can help you asses the cost-benefit of these upgrades.

4. Rental Income

If you are the owner of a commercial property, but you choose not to operate in the building, or only operate in a part of the building, you have the opportunity to rent out the extra space. Renting out part, or all of your property can help significantly decrease operation and mortgage costs.

5. Control Over The Property

By owning a commercial property, you have full control over it. This means as long as code permits, you can do anything you’d like with the property and not have to negotiate with a landlord or property owner. You will also be able to make fixed monthly mortgage payments instead of a rent payment that could be subject to increase when a commercial lease expires.

Cons Of Owning

1. Higher Cost Up Front

Typically, when purchasing a commercial property, or any property for that matter, you will need to make a down payment. When purchasing a commercial property the down payment is generally anywhere from ten to forty percent of the property’s value. Additionally, you will most likely have to pay for closing costs, origination and appraisal fees.

2. Difficulty Qualifying For Financing

If your small business cannot get approved for bank financing, you may have trouble qualifying for a commercial real estate loan with a reasonable interest rate. Your company may not have been established long enough, have enough working capital (debt-to-income), or you may be unwilling or unable to provide a personal guarantee acceptable to the bank. If you plan on only occupying part of the space, most banks prefer your business occupies the majority.

3. Liabilites

Insuring the property is solely your responsibility. In addition to insurance you would normally carry, you also need to insure the entire building. If someone injures themselves on your property, you could be responsible. This means that you will have to pay for a liability insurance policy to protect yourself from a potential lawsuit. If you rent out a portion of the property, you have liability from the entire building, even though your small business may only occupy a portion of it. Many loans also require a personal guarantee, which makes you liable to repay the loan if your business cannot.

4. Loss Of Liquidity Or Capital

While there is a good chance of your property gaining value throughout your ownership, it also has the chance to decrease in value due to market conditions or your use of the property. If this is the case and you sell your property, you run the risk of taking a financial loss. A large down-payment may be used better to fund growth or operations making ownership a hinderance to growth.

Pros Of Renting

1. More Liquidity

When leasing, you have much less cash tied up in the property. Because of this, you can use the extra cash for operations and growth. You do not need to make a down payment with a lease (other than a possible security deposit), leaving you with more cash as a result.

2. Flexibility

Given that your business will need to meet certain requirements to qualify for a loan, leasing gives you more options when looking for the right space. It is also far easier to move locations when compared to owning a property. If your business relies heavily on location, buying a property may be too expensive in the area you desire, but you may be able to afford the rent. Depending on the structure of your commercial lease, you may also be absolved of unexpected costs that can arise from property ownership, allowing for better cash flow management.

Cons Of Leasing

1. No Equity Or Appreciation

When leasing a commercial property, you do not accrue equity in the property. You can look to renovate a property to meet your specific business needs, but that would need to be approved by the building owner or landlord; even then, the possible appreciation from this renovation does not go into your pocket.

2. No Additional Income

As a tenant, you are the one paying the rent. When owning a commercial property you have the option to rent a portion out and gain a secondary income. This is not possible if you lease a commercial property.

3. Rent Can Be Expensive

While the upfront cost of owning a commercial property is far higher than leasing, the rent from leasing can get expensive. Monthly rent tends to exceed mortgage payments for the same property. Depending on the type of commercial lease you have, you may get stuck paying for costs such as insurance, property taxes, utilities and maintenance costs that don’t contribute to your equity in the building.

4. Less Control

Leases are for a finite amount of time. Depending on who owns the building, they may choose to significantly increase your rent based on your success or investment in their building.

Extra Considerations For Buying

1. Location Is Key

With buying a commercial property being a long-term commitment, be sure to select the right location. Depending on what line of business you are in, location can make or break your small business. As the saying goes, location, location, location.

2. Evaluate Cash Flow

When considering buying a commercial property, be sure to know exactly how much money your business makes and if your cash flow is consistent. Knowing this can let you know if you can afford or will be approved for a mortgage.

3. Understand Existing Debt

If your business has existing debt, buying a commercial property may not be the best option. Consider your debt-to-income (DTI) ratio which could look unattractive to lenders. You should talk to a mortgage lender and have any existing debt under control before looking to buy a commercial property for your small business.

Extra Considerations For Leasing

1. Find The Right Space And Lease Terms

If this is your first time leasing a property for your small business, we suggest starting with a right sized location, and choosing a short-term lease with an option to extend. By doing this, you ensure that your business has enough room to grow with a predictable rent increase. Like most contracts, rental agreements are negotiable, and you can use this to your advantage to ensure you get the best lease for your small business.

Businesses need to find the right location in order to get off the ground. According to the latest data from the U.S Bureau of Labor Statistics, about twenty percent of small businesses fail within the first year. Finding a low-cost, right-sized rental property may be what your business needs to get up and running efficiently.

2. Understand The Property

When deciding where and from whom to rent, make sure to do thorough research. Make sure the building is zoned for your use, and that there are no deferred maintenance expenses that will become your responsibility.

In Conclusion

Deciding whether to rent or own commercial property can mean the difference between success and failure for your small business. If you are unsure of whether renting or owning is best for you, please CONTACT US at North Consulting Services and we can help you analyze what’s best for your small business.

The post Should My Small Business Rent or Own Commercial Property? first appears on North Consulting Services

9 Insurance Types For Your Small Business

koenig.jeffrey — Fri, 01 Oct 2021 17:46:46 +0000

North Consulting Services

9 Insurance Types For Your Small Business

9 Types Of Insurance For Your Small Business

Operating a small business can come with risks. Helping to minimize risk can give a small business owner comfort knowing that if a problem arises, they will covered. One of the most effective ways to minimize risk is by having insurance. There are many options when it comes to small business insurance, and finding the right coverage for your small business can help you stay protected. At North Consulting Services we can help you better understand small business insurance and assist you in choosing the right option.

General Liability Insurance

Sometimes referred to as business liability insurance, general liability insurance is among the most common types of insurance small business owners carry. General liability insurance exists to help protect you from claims of injury, libel, slander or damage to your property. In the event someone sues your small business, liability insurance can help pay for legal costs, settlements or judgements. Accidents happen, and general liability insurance can help you be prepared.

Commercial Property Insurance

If you own or lease a property for your business, commercial property insurance is usually required by lenders and landlords. This type of insurance covers you in the event of damages to your property. It also can cover other property associated with your small business such as tools, equipment, inventory and furniture.

Commercial property insurance typically covers damage caused by lightning, wind, hail, fire, theft and vandalism. According to a survey conducted by Insureon, 15.4% of small businesses in the U.S. fell victim to damages that could be covered by commercial property insurance. If your small business operates within a commercial property, commercial property insurance can help cover you in the unfortunate event that your business becomes part of the 15.4%.

Business Income Insurance

Business income insurance, also referred to as business interruption insurance, is there to help cover you in the event that your business needs to temporarily shut down. No small business wants to close their doors, but in the event they are forced to, business income insurance can help pay for the cost of damaged merchandise, lost earnings and the expenses needed if your small business temporarily moves to a new location.

According to the Federal Emergency Management Agency (FEMA), 40 to 60 percent of businesses fail to reopen after a disaster. It is estimated by the National Association of Insurance Commissioners (NAIC) that between 30 and 40 percent of small business owners have some form of business income insurance.

Workers Compensation Insurance

Workers compensation insurance, commonly referred to as workers comp, provides benefits like health care, dental, and vision insurance to employees injured on the job. In the state of Wisconsin, if your business has three or more employees, workers compensation insurance is required by law. Workers comp can also help cover lost wages to employees in the event they are forced to take time off from work due to a work-related illness or injury. Workers comp exists to protect you and your employees in the event of an injury on the job.

Commercial Auto Insurance

A work truck used by LaBonte Construction

Many small businesses rely on their employees to drive to and from locations while at work. While most states require drivers to have personal auto insurance, these policies often exclude coverage for an accident when driving for work. By having commercial auto insurance for your small business, you or your employee will be covered in the event of an accident. Commercial auto insurance is great for businesses that own, rent or lease vehicles, as well as businesses where employees drive personal or company vehicles while at work.

Errors And Omissions Insurance

Someone has probably given you inaccurate information at some point. Occasionally referred to as professional liability insurance, errors and omissions insurance can help protect your business if you or an employee gives a customer inaccurate information or specifications. Most of the time false or inaccurate information is given in good faith, but customers have the right to take legal action against your small business if they see fit.

Errors and omissions insurance covers legal defense costs, judgments and settlements in the event of misrepresentations by your firm. This insurance is key for small businesses such as contractors, architects, accountants, real estate agents, tax preparers and advertising agencies.

There is a subcategory of errors and omissions insurance known as technology errors and omissions insurance. This insurance offers protection to small technology businesses and covers the same issues as standard errors and omissions insurance. Technology errors and omissions insurance is best suited for businesses like computer consultants, internet service providers, IT contractors and software or website developers.

Everyone makes mistakes, but some can be more costly than others. Errors and omissions insurance is there to help ensure that one mistake does not sink your small business.

Data Breach Insurance

One in five small businesses fall victim to cyber attacks, with the average attack costing a business around $9,000. With the small business heavily relying on technology, data breach insurance can help to protect you and your customers in the event your business’s data is compromised. Because of this heavy reliance on the internet, many customer’s private information, i.e. medical history, financial records, or personal information, is likely stored online. Companies with this information are vulnerable to hackers, and data breach insurance exists to protect those whose information becomes compromised.

Data breach insurance can help pay to notify an impacted business, customer, patient or employee whose information has been hacked. It also helps to pay for credit monitoring services after a data breach has occurred. This type of insurance is especially beneficial to businesses such as computer consultants, internet service providers, IT contractors and software or website developers.

Commercial Umbrella Insurance

Commercial umbrella insurance is there to add an extra layer of protection above other liability insurance policies. This can be useful if you have reached your limit on your current insurance policies, or want extra coverage just in case. The cost of commercial umbrella insurance is determined by how much coverage you choose and the level of risk associated with your small business.

Bundling Your Insurance

You’ve probably seen a plethora of insurance commercials that tell you to bundle insurances policies together to get a better rate. This can be done with small business insurance as well. The most standard bundle for small business insurance is known as the business owners policy (BOP). BOP packages property, business income and liability insurance into one.

However, BOPs do NOT cover professional liability, auto or workers compensation insurance. Larger companies might purchase a commercial package policy or customize their policies to meet special risks they may face, but this generally cannot be done with small business insurance.

In Conclusion

As we have seen, there are numerous insurance options for your small business. Choosing the right insurance for your small business can help protect you and your employees. If you would like help going over insurance proposals for your small business, please CONTACT US at North Consulting Services.

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