Choosing between buying and leasing a commercial property is a big choice many companies must make. Each alternative has its benefits and there is no easy, single-size-fits-all solution.
Buying Commercial Property
Commercial real estate ownership may be lucrative, but it can also be disastrous for individuals who enter without a strategy. At the very least, buying commercial property carries risks for individuals who operate unreasonably.
Pros of Buying Commercial Property
Appreciating Asset
The growth in the value of your property over time is an advantage of owning commercial real estate. Variables such as inflation, local supply and demand, interest rates and others affect the appreciation rate.
Rental Income
A majority of companies that purchase a commercial property do so with the intent of occupying at least 51% of the space and renting out the remainder. Rental money is generated, but you are liable for any tenants renting out the area as a landlord.
Increasing Your Net Worth
You immediately own 100% of the property if you pay in cash. If you take out a loan, your down payment and regular payments build equity in the property. If you refinance or sell your property, your equity is the difference between the fair market value and the outstanding loan debt, and it goes toward your overall equity.
Control
You have authority over your property when you own it, so you don’t have to argue with a landlord if you want to rearrange the area. You’ll also have a fixed monthly mortgage payment rather than a rent payment that might fluctuate depending on when your lease ends.
Cons of Buying Commercial Property
Inability To Move Your Business
An important benefit of a lease is that it allows you to opt not to renew it at the end of the term and move into a property better suited to your needs. Owning the property makes it harder to sell and move into a new facility when your business expands or contracts.
Up-Front Spending
A purchase may require up to six times as much money upfront due to down payments, closing charges, and due diligence fees. Most lenders will require at least a 10% down payment, but it can be as much as 40%. This means that your organization will need liquid funds upfront to close.
Liabilities
You will be held liable if someone is injured on your property, which means you will need to get liability insurance coverage to protect yourself against litigation. If you rent out a portion of your property, you’ll be liable as a property manager and that requires additional insurance & upkeep.
Qualifying for Finance Is Difficult
If you or your firm cannot obtain bank financing, you may have difficulty getting a commercial real estate loan with a fair interest rate. While the greatest commercial real estate loans might have interest rates as low as 4%, hard money lenders’ loans can have rates as high as 10%. This situation might make leasing a better alternative.
Leasing Commercial Property
A commercial real estate lease is an arrangement between a business and a landlord that permits the firm to rent commercial property.
Pros of Leasing Commercial Property
Depreciation Risk
A rise in the value of commercial properties has provided building owners with more equity and wealth, but that growth may not be sustainable. Many analysts predict that a real estate market correction will occur within months. Your property will depreciate solely due to market conditions rather than any actions you took to enhance it.
Tax Breaks
In addition to the rent, property insurance, property taxes (depending on the type of lease), utilities, and maintenance are all tax-deductible expenses, unlike a mortgage, where only the interest is deductible.
More Flexibility
Because qualifying for a lease is generally simpler than qualifying for a commercial real estate loan, you have more choices when choosing a location. You don’t have to sell the property if you want to move after your lease expires.
More Liquidity
A lease will require substantially less money upfront than an acquisition. Some funds will likely be required for a security deposit, a pre-lease inspection, legal fees and perhaps a broker’s fee. The total expenditures are much lower than needed for a purchase, so you will use fewer liquid resources to acquire the property.
Fixed Monthly Cost
When you lease a property, you are usually not responsible for any significant maintenance, repairs or upkeep, although minor repairs may be necessary. Instead, you’ll know exactly how much you’ll have to pay each month and won’t have to be concerned about unexpectedly high maintenance costs.
Cons of Leasing Commercial Property
No Control
The lease may include early termination provisions that limit the tenant’s ability to manage the rented space. Rent increases are out of your hands when your lease ends, and if your business closes, you must continue paying rent or face fines.
No Equity or Appreciation
When you lease a commercial property, you don’t build up any equity; however, some leases include a lease-to-own provision that allows you to use a part of the rent you’ve previously paid toward purchasing the property. Equity is necessary for capital appreciation to occur.
No Passive Income
You won’t be able to collect rent from others because you aren’t the landlord. Thus you won’t be able to earn any extra revenue from owning property.
Poor investing procedures may lead to disastrous consequences and the magnitude of commercial investments further adds to the problem. As a result, having a solid plan in place pays off. You are more likely to avoid the pitfalls of commercial investment and achieve success if you have established systems on your side. Whether buying or leasing a commercial property is ultimately a decision based on your financial situation, company and needs.
Hamptons Commercial Real Estate is a full-service commercial real estate firm that specializes in real estate investment, property management and brokerage. Whether it’s a purchase or lease of a property, we guide our clients through the process.
