Determining Your Budget When Leasing Commercial Space
This week, I thought I'd answer a question I’m often asked which is "How do I determine my budget for leasing a commercial property?" Although there's no one-size-fits-all approach, I think there's a good formula you can utilize to get an idea of what your budget should be. This formula is called your business’s “rent to revenue” ratio. Your rent to revenue ratio is the relationship between the rent you pay for your commercial space and the gross revenue of your business. The lower your rent to revenue ratio is, the more affordable the rent is for your business. As an example, let's say that you spend $12,000 per year in rent (i.e. $1,000 per month) while your business generates $120,000 in yearly revenue. Your rent to revenue ratio would be calculated as follows:
Rent to Revenue Ratio = $12,000/$120,000
Rent to Revenue Ratio = 10%
In this scenario, your rent to revenue ratio would be 10%. Now you may be wondering “is this a good value?” Unfortunately, it will vary based on your industry. For example, if you're a lawyer who charges a high dollar value for your services and you require a prestigious address to attract an affluent clientele, you could probably get away with a higher rent-to-revenue ratio, maybe in the 10-15% range.
However, if you own a restaurant or another retail concept where your business model focuses on selling high volume at low margins, you're probably going to want your rent-to-revenue ratio to be lower, probably in that 3-10% range.
To calculate your rent-to-revenue ratio, you must first determine what your revenue is. If you’re already in business, look back at your prior year revenue and use that as the basis for your evaluation. On the other hand, if you're just starting out, I recommend researching online for first-year projections of similar businesses in your area. That way, you’ll have an idea of what you can afford as you begin your search for commercial property.
As always, I hope you gained some value from this article. I always enjoy providing engaging and useful contact that my audience can enjoy. If you’re in the market to buy, lease, or sell commercial property, I’d be happy to help! You can reach me via email at raphael@grisantigroup.com or via my cell at 502-536-7315. I’m excited to hear your feedback in the comments below!