Should you own or rent your woodworking shop? There are pros and cons of both, of course, but you should consider that most homeowners choose to own as a long-term investment. That might not be the ideal strategy for your woodworking business, in which you make your money, not by holding long-term assets, but by producing and selling products. Here are some reasons why you might choose to rent instead of own.
1. Smaller Startup Capital
“It takes money to make money,” the saying goes. Every business venture requires an initial capital investment — in the case of woodworking, this includes your tools and equipment as well as your physical location. For a home-based woodworking business, a bare beginning machine set is easily $1500, and wood and other materials, another $2000. If this seems like a lot to you, consider what it costs to purchase a building.
Purchasing a property requires a sizable down payment, usually 20% of the total purchase price, as well as closing costs and agent fees over and above the purchase price. In contrast, renting business property (as opposed to residential) can have much lower upfront costs. For a beginning woodworker, the option to rent space in a shared workshop may reduce your startup costs even further, if there are major items of equipment already in place.
2. Lower Monthly Payments
You might already have needed to take out a business loan for your upfront business expenses. Why take out a mortgage in addition? Mortgages are typically for a term of thirty years, and in the beginning, you will be making payments more on the interest than on the principal. This means that it takes a while to build up significant equity. Depending on where you rent, you may find that your monthly rent payments are considerably less than mortgage payments would have been.
3. More Mobility
Suppose your business does not stay in the same location for thirty years? If you own your building, you must either find a buyer or a tenant before you can relocate. Renting out a building you own brings its own complication — it can be another business in itself. Do you have the time and desire to manage that venture alongside your woodworking business? What if your business outgrows its space, but you cannot find any buyer or tenant for the building you own?
You have to keep making the payments on it, while also paying for your new, larger space. If renting, you do not have this problem. You can vacate as soon as you find a new location, and your former landlord is then responsible for finding a new occupant. If for some reason you decide to close your business, the same problem applies if you own your building. But if your business was a tenant, you have less to liquidate, i.e. only your tools and movable equipment.
4. Shared Responsibility
Ask any homeowner how much time and money they spend on maintenance. Commercial and industrial buildings require maintenance as well. Since you probably do not have time to dedicate to this and your woodworking business at the same time, this means hiring a contractor whenever maintenance is required — whether repairing the plumbing or replacing rusty siding. This represents one more expense reducing your margins.
On the other hand, if you rent a building, your lease will specify who is responsible for what. The landlord is typically responsible for much of the exterior building maintenance. If you rent space in a shared workshop, the landlord will likely be responsible for maintaining the common spaces, as well. The money you are not spending on maintenance can be invested into your business instead, or put into saving for your long-term financial goals.
5. Tax Advantage
Depending on your particular situation, renting may prove to be a tax advantage. The interest payments on a commercial mortgage are deductible, but principal payments are not. By contrast, rent paid on a building used solely for your business is 100% deductible. After factoring in depreciation (if you own), the amount of your monthly payment, and your profits, you can determine whether renting or owning is the better choice, tax-wise.
How much of your tax burden can you offset with each option? Is the tax offset worth the expense? There is also the consideration that selling a building at a profit subject you to capital gains tax. This is not the case with selling a lease, unless you sell at a premium.
6. Location, Location, Location
Your business can attract more customers if it is located in an existing commercial/industrial area. These locations often have multi-unit buildings where you can rent just the amount of space you need in a building shared with other businesses. Obviously, this will cost less than having to purchase an entire building much larger than you need.
7. A Good Way to Get Started
If you are young, or just starting out as a business owner, you might not have the established credit or income stability that a mortgage lender is looking for. For a young person, renting one’s business space can be the best choice for the same reason that renting one’s living space can — the credit requirements are more likely to be within reach. It is important to remember that all business ventures start small.
The wise entrepreneur will not try to get too big too soon. Instead, it is far better to begin with modest goals, and this means considering carefully every expense, taking on only as much as you need at first. As your business becomes more profitable, then you can begin to consider upsizing.
Takeaway
Renting a woodworking shop can bring having a woodworking business within reach of many who would not be able to purchase a building. IsGood Woodworks offers several shop rental options, including monthly and per-use rates, which include access to storage space. There are bins of materials and supplies available free, which will help to reduce your costs. If you are looking to start up a woodworking business, this is a good place to get started.