To buy or lease commercial real estate—That is the question!
While not quite as dramatic a decision as Hamlet’s soliloquy, the decision to buy or lease the property for your commercial business is an important one. Unfortunately, it’s not a cut and dry answer. Your choice should be informed by the nature of your business, its financial solvency, and your short- and long-term business goals.
Today, we’re examining the pros and cons of leasing versus buying your commercial real estate space. But first, what’s the difference between buying and leasing a commercial property?
What’s the Difference between Buying and Leasing Commercial Property?
You can think of handling commercial real estate in many of the same ways as managing residential real estate. Buying a commercial property means purchasing it outright with cash or loan proceeds. Once that loan is paid off, the property is all yours. Leasing a commercial property is analogous to renting it from its owner. Whether you agree to a short-term or long-term lease, you are a tenant of the space rather than the property owner.
There is no one answer for whether it’s better to buy or lease commercial real estate. In fact, there are many pros and cons for each decision.
Pros of Leasing a Commercial Property
Leasing your office, retail, or industrial space can have many benefits. This is especially true for start-ups or rapidly growing businesses. Among the benefits of leasing your commercial space are:
- You can maintain your capital and keep your lines of credit open for other business needs.
- When you lease, you are able to fully deduct your lease payments as a business expense.
- You can grow and contract your operations more easily, as may be dictated by your particular business cycle or the economic climate.
- If you plan on staying in this location less than seven years, you will likely save money by leasing.
- There are risks and responsibilities typically associated with property ownership that you can avoid by leasing, such as property maintenance and repairs.
- If you need to or plan to relocate at the end of your lease term, leasing affords you more mobility.
Cons of Leasing a Commercial Property
If you have a stable, long-running business, it’s likely that you’d be better off buying than leasing. In those cases, reasons not to lease include:
- You have a lack of control over the terms, cost, and availability of your lease.
- There are upfront costs to leasing, including security deposits, a pre-lease inspection, and leasing fees.
- You have less control over property additions and renovations.
- Leases typically increase after each lease term and can be expensive to renew.
- You run the possibility of being forced to relocate at the end of the lease term.
Pros of Buying a Commercial Property
Especially for businesses planning to remain in the same location for seven years or more, buying a commercial property is advised over leasing. Among the benefits of purchasing your commercial property are:
- If you will be at this property for more than seven years, you will save more money in the long run than if you lease.
- You eliminate your exposure to market fluctuations in rent costs.
- As the property value appreciates, you will see investment and capital gains.
- You can receive tax deductions for interest and annual depreciation.
- You have the ability to sublet or tailor the property to your needs as your business grows or contracts.
- If you do take on other tenants, as the landlord, you have control over them and the permissible building uses.
Cons of Buying a Commercial Property
Property ownership comes with many restrictions and responsibilities. If any of these look prohibitive to your business, you may be better off leasing your commercial space:
- There are larger initial costs to opening at your location. Down payments typically run between 10–30%. You must weigh the opportunity costs of investing this money in a property loan rather than your growing business.
- Initial costs also include due-diligence fees and closing costs.
- If your business outgrows the space quickly, moving becomes more prohibitive.
- There are added legal and regulatory responsibilities associated with owning commercial real estate.
- You are responsible for maintenance of the property.
Should You Buy or Lease Your Commercial Real Estate Property?
When deciding whether to lease or purchase a commercial real estate property, it’s best to consider your business’s short- and long-term goals. If your business is just getting off the ground, leasing may give you the flexibility and leverage to grow at your own pace. However, if you realistically see your business being comfortable in a space for more than seven years, it is almost always more financially beneficial to buy.
When you are ready to make your decision, the expert commercial brokers at NAI Beverly-Hanks Commercial are here to help. Contact us today to learn more about the best way to advance your local and regional business endeavors.