Lease vs. Own in Today’s Market: Small Businesses and Big Decisions

A common dilemma among small business owners is whether to buy or lease commercial property in today’s market. This decision can be especially difficult in competitive real estate markets, such as those of California.  

Two California markets, San Francisco & Los Angelesranked among the top four fastest growing cities globally. San Francisco led the rankings by a wide margin with commercial property prices up 14.6% year-over-year in Q2 2019.  With increasing lease rates, business owners are at the mercy of their landlord and run the risk of being priced out of their area. It is no wonder they are unsure about whether to lease or own their building 

The purchase of commercial real estate may sound daunting to a small business owner however, there are many benefits to owning property that should be carefully weighedFirst and foremost, occupancy costs will be stable, helping to accurately budget and plan for the future. Peace of mind is gained from the stability and knowledge that the operating location is owned and displacement will never be an issue. 

By purchasing commercial real estate, small business owners will no longer pay someone else each month  they will pay themselves.  There is no reason why business owners should continue to make their landlord rich when they could be writing their rent check to themselves each month. 

In addition, owning commercial property can help business owners establish steady income postretirement. Equity that comes from buying real estate can be used to fund further expansion of a business or can be used towards a retirement strategy.  Upon retirement, owners could rent their building or sell itto preserve a considerable nest egg for the future 

Despite how encouraging the benefits to owning can bethe fact of the matter is that most small business owners do not think they can afford to buy real estate. But if they do it right, purchasing IS attainable. 

How? The answer is simple – buy your building through the SBA 504 Loan Program.  

The Small Business Administration’s (SBA) 504 Loan Program is an accessible and affordable financing solution to help businesses avoid fluctuating occupancy costs amidst today’s rising market. The 504 loan allows small and medium sized businesses to finance the purchaseconstruction or refinance of commercial real estate with long-term, below-market, fixed interest rates.  Business owners that purchase their building through the SBA 504 program will gain long term stability and peace of mind knowing that potential rent increases will not drive them out of the area. 

Many small business owners choose the SBA 504 real estate financing because the benefits are more attractive than what conventional financing typically offers. Some of those benefits include:  

Low Down Payment. The low down payment is one of the biggest advantages of the 504 Loan Program. Unlike conventional loans that often require a 20-40 percent down payment, the 504 loan requires only 10%.  In some cases, a down payment of 15 percent is required, such as when the loan is being used to purchase a special use property or if the business has been in operation for less than two years. However, this is still significantly less than conventional financing.   

The low down payment is vital because it allows business owners to conserve working capital and focus on business growth, instead of filling their landlord’s pockets.  

Below-market, FIXED interest rate The SBA 504 Loan Program’s interest rates for owner-occupied real estate fell to an all-time low last summer. The rates were the lowest in the 33-year history of the program. The 504 fixed rate is unaffected by market instability.  The rate is consistently low and stable, being under 6 percent for the past 10 years.  Today, that rate is 3.46 percent fixed for 25 years.  For business owners who are tired of battling continuous rent increases, now is the time to secure these low rates.  

Long term. The 504 rate has loan options of 10-years, 20-years, and 25-years. It is fully amortized through the life of the loan, meaning there is no balloon payment at the end of the term. The long term rates provide small business owners with affordable monthly payments and enables them to control their overhead costs well into the future. 

If you are a small business owner and considering purchasing commercial real estate, it is important to remember that this investment does not only create wealth for you and your business, but also strengthens your financial stability in the future. Ultimately, by making the decision to purchasyour building through the SBA 504 program, you are protecting your business against volatile rental markets and setting your business up for success 

The 504 Program & Support from a Certified Development Company 

The SBA 504 loan is administered through nonprofit mission-based lenders, also known as Certified Development Companies (CDCs), such as TMC Financing.  A CDC’s mission is to help match you with the loan product that will best support your growth, gain long-term success and create a positive impact on your community. CDCs guide business owners through the entire loan process and act as the owner’s advocate throughout the life of the loan. 

CDCs can provide a prequalification analysis to small business owners, so they know their purchasing power and can act fast when they find the right opportunity.  A prequalification letter can give you a leg up over other offers, which in the competitive California market, can make or break a deal.  TMC can provide a free prequalification letter within 48 hours. 

Learn More 

If you are a small business owner in California or Nevada and you would like to learn more about the SBA 504 Program and purchasing a building for your business, please contact a TMC Financing loan expert. If you are located outside of California or Nevada and need help finding a local certified development company, we can help you get the process started. TMC Financing is the No. 1 CDC in the nation. For nearly 40 years, TMC has helped over 5,000 businesses secure financing for projects worth over $12 billion.