Is it better to buy or lease commercial real estate? There are pros and cons to both, and there’s not a one-size-fits-all answer. Here’s what you need to know about the difference between buying your own commercial space vs. renting or leasing from a landlord.
What Does It Mean to Buy vs. Lease?
When you go the route of buying commercial property, you are paying for full ownership. An upfront payment, at least 10% down, is required. Once purchased, you will have complete control of the property.
When you go the route of leasing commercial property, you are renting the property from a landlord. You will be responsible for monthly rent and associated costs. You have temporary rights to the property until your lease ends.
Benefits of Buying Property
Gaining Equity
When you own your property, you gain equity with each mortgage payment. This could be a good investment for your business. Typically, over time, property value increases. Most commercial properties experience a notable increase in value from inflation rates, higher supply and demand, and similar factors. Marketable renovations will also increase your property value. With a higher property value, if you choose to sell your property, you could make a considerable profit.
Leasing Potential
When you have full rights to a property, you have the choice to lease a portion or the entirety of the property to another business. This is especially helpful if you are only using a portion of the real estate property or if you outgrow it after a few years. You’ll not only be making a profit from your own business but from rent as well.
Tax Benefits
You’ll receive yearly tax benefits for interest, depreciation, and many expenses that aren’t related to your mortgage. Talking to an expert will help you understand what tax benefits you qualify for.
Why You May Not Want to Buy
Pricey Upfront Costs
When you are buying commercial property, you have considerable expenses. Purchasing properties requires paying a down payment, which ranges from 10-40%, closing costs, inspection fees, and due diligence. If you choose to buy, you need to have a large budget.
Liability and Insurance
Owning commercial real estate means that you are responsible for several things. First, you are responsible for anyone on your property. This requires liability insurance to protect against emergencies or injuries. Your insurance additionally needs to protect the property from any damages or losses that can occur. Insurance can be expensive and requires extensive research to find the best option.
Maintenance Fees
Property owners are also responsible for all maintenance. Regular and unexpected maintenance can become very costly.
Risk of Lower Property Value
While property value is normally projected to rise over the years, that’s not always the case. You run the risk of your property value lowering significantly over time. This can make selling the property difficult.
Permanent Location
If you no longer like where your business is located, it is a long and difficult process to sell your property and find new real estate. You need to be confident that you have the perfect location, preferably one that will continue to suit your needs for years to come.
Benefits of Leasing
No Expensive Upfront Costs
Leasing may require a down payment, but this payment is typically returned to you at the end of your lease term. You aren’t responsible for other expenses, like closing costs. Depending on the lease, you could have common area maintenance charges and other fees, but the tradeoff is that your landlord will take care of maintenance so you don’t have to worry about it.
Tax Benefits
When leasing, you may receive tax benefits for lease payments, property taxes, utilities, and more. Talk with an expert about what tax benefits you qualify for from leasing a commercial property.
Nonpermanent Location
Leasing a property is flexible. You may choose to stay there for just one or two years, or you may choose to remain there for many years. This is an excellent advantage if your business may need to expand or relocate in the near future.
Easier to Get into Existing Developments
Existing developments typically bring in more profit, especially if they are in a high-traffic area. Purchasing properties in these desirable developments can be difficult. Renting commercial property in desirable areas is often easier.
Why Leasing May Not Be the Best Choice
Higher Monthly Payments
Depending on your situation, commercial lease payments could be costlier than a mortgage. Your monthly rent may be fairly costly, especially if it is located in a desirable existing development. Plus, you’ll have to pay for things such as utilities, parking, and maintenance.
Limited Control of Property
Your landlord is completely in control of your property. This includes renovations, maintenance, and changes to any part of the property. Depending on the lease, you may have limited ability to change the property to suit your needs.
Payments Aren’t Fixed
Leasing a property runs the risk of your monthly payments being raised when you renew your lease. If the property value of the building increases or supply and demand change, your landlord may increase your rent. This could potentially make the property unaffordable for your business.
In a Nutshell, Should You Buy or Lease?
You should choose to purchase commercial real estate property if:
- You’re positive this is where you permanently want your business to be located
- You want full ownership of your commercial real estate, such as making renovations and receiving tax benefits
- You can handle expensive upfront costs
You should make the decision to rent commercial real estate property if:
- You want to be in a desirable existing development or location that’s expensive to buy
- You can’t afford upfront, pricey fees
- You want flexibility with your location
- You don’t want all the responsibilities of owning the property
Get Advice on Buying Vs. Renting Commercial Real Estate
Consulting an expert will get you the advice you need to choose the right option and navigate the whole process. Speed Commercial Real Estate’s team of experts is prepared to help you with buying and leasing commercial real estate. Contact us for more information!