Is It Best To Buy Or Lease A Commercial Building?

Real Estate

Businesses typically operate out of commercial spaces, whether they are offices, factories, or storefronts. If you are either launching your new business or expanding your existing one, it is important to decide how you are going to finance the acquisition of the property.
Two options are available to you when it comes to commercial property acquisition: buying and leasing. If you buy a commercial property, you either finance it using a loan or pay cash up front. If you choose the lease option, you rent the property for a set period and have to renegotiate the lease upon the expiry of this period if you wish to continue using the property.
Both options have their pros and cons and making the right decision requires a lot of planning, research, and analysis. The following is a detailed look into these pros and cons to help you make an informed decision. It is important to weight them effectively if you wish to navigate the delicate decision to the best advantage of your business.
Buying Commercial Real Estate
Commercial real estate is a long-term asset that can maintain its value over time but only if it is properly maintained. Here are the pros and cons of buying a commercial property.
Pros:
Appreciating Asset: Owing a commercial property outright gives you the chance to benefit from capital appreciation or the growth in the value of the property over time. The rate of appreciation depends on the interest rates, supply and demand conditions, inflation rate, among other factors.
Building Equity: If you buy the property and pay all cash, you own all of the property. If you take out a loan, the down payment and monthly payments help build equity in the property. Your equity in a commercial property helps build the overall value of your business.
Control: If you own a commercial property, you have control over it, which means that you never have to negotiate with a landlord whenever you wish to reconfigure the space. You also make fixed mortgage payments every month and not rent payments that may be changed upon expiry of your lease.
Rental Income: Businesses that buy commercial property usually occupy at least 51 percent of it. The reason for this is that lenders classify such properties as investment properties if the share of ownership is less, which is a factor that can make it harder to qualify for a loan. If you have any leftover space, you can rent it out and create a supplementary income stream.
Tax Benefits: You can deduct depreciation, interest, and other non-mortgage expenses on your commercial property. However, you cannot deduct mortgage-related expenses such as closing costs or negotiation fees. The only deductible is the interest portion of the mortgage payment.
Cons
Upfront Spending: You will be required to make a down payment of between 10 and 40 percent of the value of the property. You also have to pay due diligence fees and closing costs.
Prepayment Penalties: Commercial real estate loans usually have hefty prepayment fees or other penalties in the form of defeasance or maintenance if you prepay the loan balance.
Difficulty Qualifying for Funding: If your business is “unbankable”, you might have trouble qualifying for a commercial real estate loan with a reasonable interest rate. During economic recessions, you are also likely to find it harder to obtain funding irrespective of your creditworthiness.
Capital Loss: The possibility always exists that the value of your property will decline and that you could take a capital loss in case you opt to sell.
Loss of Liquidity: Your funds are tied up in the property and you have either to sell or do a partial cash-out refinance if you wish to recover it. The money tied up in the property could have been used for other opportunities if you had leased instead.
Leasing Commercial Real Estate
Commercial leases usually run from between 3 and 10 years. During the lease period, you will get use of the property subject to the restrictions outlined in the lease agreement.
Pros
Additional Liquidity: Less of your cash is tied up since you aren’t required to make a down payment before moving into the space. However, you can expect to pay upfront fees for a security deposit, prelease inspection, broker, and attorney.
Easier Budgeting: With leasing, you don’t have to pay for major repairs, maintenance, or upkeep to the property, which may amount to significant unforeseen costs. Instead, you will know exactly what you are required to pay every month.
Focusing on the Business: It is quite complicated to manage a commercial property since there are maintenance costs, insurance requirements, and other issues that may distract you from the business. With leasing, you can focus solely on running the business.
Flexibility: Qualifying for a lease is usually easier than qualifying for loan, which means that more options are available to you when it comes to choosing a location. You might be able to afford to lease a property that’s too expensive to buy, which may help you get into a strategic or prime location.
Tax Benefits: You can deduct these costs as incurred: property taxes, property insurance, lease payments, maintenance, and utilities. You are also free to deduct the entire lease payment.
Cons
No Control: Your lease might have restrictions that limit your control over the rental space. You might have no control over when the lease expires or even over rent hikes. If you unfortunately go out of business, you have to keep up with your rent payments or be penalized.
Expensive Rent: The monthly rent payments are typically higher than mortgage payments on the same property. A typical lease agreement makes tenants responsible for utilities, property taxes, monthly retail insurance, and maintenance costs.  For commercial real estate for rent near me, click here.
No Appreciation or Equity: If you opt to lease, you won’t accumulate any equity and without equity it is impossible to benefit from capital appreciation.
It is quite evident that both buying and leasing commercial real estate offer numerous significant advantages and disadvantages. The best way to make the best decision regarding which one to choose is to understand both options and evaluate them based on your specific business.