Buy or Lease Commercial Property: You may need to decide whether to lease or buy the new location if you plan to relocate your business. When making this selection, consider your company’s planned growth, income, and regulatory needs. While buying a home may help you save money on rent over time and profit from rising property values, the initial cost will be much higher than leasing.
Benefits of Buying a Commercial Property
- Property control: Having property control may be required, especially if you intend to make large renovations. Buying the property can also help if you wish to have flexible business hours or operate your business in a very different way than you were doing it previously.
- Long-term monetary outlay: The overall monetary outlay in the form of rentals that you must pay over many years may wind up being greater than the cost of purchasing a house. If you own a business, such as a retail store, where location is vital, buying may be a preferable alternative because future rent hikes by the landlord may compel you to leave the property.
- Leaseable properties are not available: There may be times when there are no properties available for lease that meet your needs. Purchasing a home may be the only option left.
- Growing land value: Buying makes more sense if you want to relocate to a location where land and property values are rising. Property values may rise as physical and social infrastructure in the area improves, or as demographics improve. It is ideal if such trends are recognized early before prices have already risen. If you buy a home in such a location, you will be able to save on rental payments as a result of property value growth.
- Tax advantages: A purchase agreement may allow you to save money on taxes. While your rent may not be deductible, the money you spend on purchases may be. If you take out a home loan, you can additionally deduct the interest paid on the EMIs. This can result in significant savings.
Drawbacks of Buying a Commercial Property
- Upfront Expenses: You’ll often be required to make a down payment of 10% to 40% of the property’s worth, as well as closing costs, origination and appraisal fees. For example, on a $1 million home, you should expect to pay somewhere between $100,000 and $400,000 in down payment and other fees out of pocket.
- Difficulty qualifying for finance: If you or your firm cannot get accepted for bank financing, you may have difficulty qualifying for 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%, loans issued by hard money lenders can have rates as high as 10%. In this scenario, leasing may be more cost-effective.
- Penalties for early payment: Many commercial real estate loans have high prepayment penalties or other commercial real estate-specific penalties, such as yield maintenance or defeasance, if you prepay the loan sum.
- Amount of liabilities: You are liable if someone is injured on your property, which means you must have liability insurance to protect yourself from litigation. If you rent out a portion of your property, you will be exposed to property management responsibility, which would necessitate additional insurance and property maintenance. Furthermore, many loans may need a personal guarantee, making you personally accountable to repay the loan if your firm is unable to do so.
- Capital or liquidity loss: There is always the possibility that the value of your property could fall and you will incur a capital loss if you decide to sell, which is a disadvantage. Furthermore, because your money is locked up in the property, you may face liquidity concerns. If you want to get your money back, you’d have to sell your home or do a partial cash-out refinance. Furthermore, if you had leased instead, the money invested in the home could have been used for other opportunities.
The Benefits of Leasing a Commercial Property
- Cash flow: A lease is better than a purchase in terms of cash flow. If you are very new to the business and your revenue stream is still growing, leasing is a better option. When renting, your initial outlay will be limited to the security deposit and the first month’s rent. In the case of a purchase, your initial outlay will be the entire purchase price or, at the very least, the down payment for a loan, which is normally rather large.
- Property maintenance: In many circumstances, the landlord is responsible for property maintenance. If you don’t want to deal with routine maintenance and instead focus on your primary company, leasing may be a better solution. In the event of a lease, maintenance expenses are cheaper. Aside from day-to-day repairs, if you purchase the property, there may be major fees for maintaining the structural soundness of the building.
- Maintaining flexibility: You may wish to maintain flexibility and avoid being tied down to a single area for an extended period of time. It is significantly more flexible to lease than to buy outright. Moving to a new area by selling the purchased commercial property may not be a wise idea, especially if property values are rising.
- Your company’s credit rating cannot support a loan: Your company’s credit rating may or may not be able to acquire a loan for the purchase of a property, or the interest rate may be quite high if the rating is relatively inferior. If your company has lately experienced financial difficulties or instability, banks may be unwilling to grant you a loan. However, this does not preclude you from renting out property.
- Locales with dropping property values: Some areas may be experiencing declining property values. You should lease rather than purchase a property in such a location if it meets your business needs.
The Drawbacks of Leasing a Commercial
- There is no equity or appreciation: When you lease, you don’t build up any equity, however, some contracts include a lease-to-own commercial property option that allows you to apply a portion of the rent you’ve previously paid toward the purchase of the property. You do not gain from capital appreciation if you do not have equity.
- There is no passive income: You cannot collect rent from others because you are not the landlord, resulting in a loss of secondary revenue from property ownership.
- Rent is excessively expensive: Your monthly rent payments will typically exceed your mortgage payments on the same home. Under a triple-net lease, tenants are frequently responsible for monthly retail insurance, property taxes, utilities, and maintenance payments. When your fees are included in the lease payment, they are larger, although after-tax prices vary depending on the situation.
- No control: The lease may contain limits or even early termination clauses that limit the tenant’s capacity to manage the rental space. When the lease ends, you have no influence over rent increases, and if you go out of business, you must continue paying rent or suffer fines.
Why is leasing preferable to purchasing a property?
Cash flow: A lease is preferable to a buy in terms of cash flow. If you are very new to the business and your revenue stream is still growing, leasing is a better option. When renting, your initial outlay will be limited to the security deposit and the first month’s rent.
Why do huge firms lease rather than own buildings?
Leasing can provide businesses with more flexibility. If a company needs to relocate, or if sales decline and the company closes or downsizes, they are not forced to sell a property.