If your business makes $1 million per year, that’s terrific. But if your annual rental costs for your prime commercial real estate is $999K, your profits are suddenly not all that great. While our example may be a bit far-fetched, it’s not unusual for businesses to end up with leases that constantly gobble up a large portion of their profits.
Calculating Rent Based on a Percentage of Sales
One way to keep your rent costs in check is to calculate your target rent based on a specific percentage of your gross income. Depending on what you’re selling, the standard gross-to-rent percentage can range anywhere from less than 1 percent all the way up to more than 13 percent, with most industries paying below 10 percent.
Examples from a variety of industries include:
- 0.46 percent: Gambling establishments
- 1.12 percent: Gas stations
- 2.09 percent: Electronics and appliance stores
- 2.66 percent: Educational services
- 2.82 percent: Finance and insurance companies
- 3.19 percent: Arts, entertainment and recreation facilities
- 3.21 percent: Food and beverage shops
- 3.30 percent: Books, hobby, music, sporting goods stores
- 3.37 percent: Health and personal care stores
- 3.46 percent Insurance agents and brokers
- 3.86 percent: General merchandise stores
- 5.52 percent: Health care and social assistance organizations
- 5.81 percent: Food and drink establishments
- 5.98 percent: Furniture and furnishing stores
- 7 percent: Hotels, accommodations
- 7.66 percent: Clothing and accessory shops
- 13.55 percent: Ground transportation companies
Doing the Math
Calculating what percentage of your sales go toward your rental costs involves a straightforward equation.
- Determine the annual cost of your rent
- Divide the annual rent by your gross annual income
If your annual rent is $122,255, for example, and your gross annual income is $1.98 million, you would divide $122,255 by $1.98 million.
Your total would come to 6.17 percent.
That means for every $1 your company earns, 6 cents goes toward the rent.
Using the Calculation for a Future Commercial Location
If you’re in the market for a new commercial space, you can use the same concept to target the maximum amount of rent you can feasibly pay to still earn your desired profits. You may also start with a rental cost for a potential location and then determine how much overall money you need to make to hit the target percentage of your sales.