At some point or the other, every small business owner will face the dilemma on whether to buy or lease the commercial property. This is a very common step that occurs and has occurred in the life of very many big business folks who started small.
So here comes the million dollar question! Buying or leasing commercial property? Which one is better?
Well, there is NO straight answer to this question as it depends on a lot of factors, and the pros and cons for both of these options need to be tested in the light of the buyer’s conditions, financial capabilities, asset management capabilities, business growing indications and so on.
This process of weighing the pros and cons of both the options is the first and foremost step that needs to be dealt with in regards to making an informed decision.
So we bring you the pros and cons of buying and leasing the commercial space which will help you in taking the final call! Here we go!
Pros of buying the commercial property
1) Fixed cost investment
Buying the commercial property is a fixed cost which will give you the clear indication of your money outflow.
It’s a one-time investment or if paid in installments, more than that, but since the price is fixed when signing the deal, it’s deemed to be a one-time investment.
Hence you’ll not have to think about the earning capacity of your business for the upcoming years because the payment for your commercial property is processed one time!
Once and for all!
2) Passive earnings
Often, the entire commercial space is not put to use by the owner. A part or the portion of the building is given to others in the form of lease or rent which can bring owners some passive earnings.
So if you want to also earn from your commercial property, you can always rent out a portion of it.
This is one of best ways to avoid dead space investment. The same space when given to others can be put to use by them which will, in turn, give you handsome returns on your investment.
3) Tax savings
The cost of purchasing the commercial space will have good deductions when the income from your business is assessed. The associated items of expenses like property taxes, mortgage payments can be claimed as deductions.
Hence it’s a form of direct tax savings. Loan for purchase of the commercial property will also be given tax deductions on the amount of interest paid in the process of repayment of the loan.
4) Source of retirement savings
When the commercial property is bought by you, you can enjoy all the fruits of the land appreciation value in the long run.
So at the time of retirement or let’s say you held the property long enough, when it is time for you to sell the building and you stand the chance to earn X (2 to 3 times minimum anticipated) multiples more than your initial investment in the building which will act as your retirement savings!
Cons of buying commercial real estate property
1) Big investment which needs to be made upfront
The cost of your commercial property space is going to be large and it needs to be paid off upfront. Even if you plan on financing the deal, a considerable down payment is in order.
This big payment might have negative impact on other commitments you have. Consulting a commercial property loan broker is always a great idea in order to get the best loan deal for you!
So if you have the capacity of investing higher portion of your investment cash upfront, then and only then, this will work the best. If not, it’s not a good option for you!
2) Lack of flexibility of the business
We all know that the very nature of a business is to be highly dynamic. The needs of the business keep changing according to the changing needs of the customers and their buying patterns.
Your business space may be the best today and may give you high returns but will it remain the same even after long period of time?
The future is uncertain and there’s always a chance that you might be forced to sell your commercial space because the office space is bringing you no good profits.
3) The fast-growing technology
The fast-growing technology is a disadvantage for many businesses.
Today’s technology becomes obsolete tomorrow. So you never know the time period until which your business would be performing well.
Your business may have hundreds of people walking in every day to your commercial space and this might be bringing you good business. But what would happen if this trend of visiting the office in person becomes lesser?
What if your product becomes available online and buyers start purchasing the goods online?
That will directly take away a large chunk of your customers!
Hence, the factor of fast-growing and fast-changing technology can act as the biggest disadvantage of buying a commercial space as you’ll be investing loads of money with the aim of recovering it tomorrow but your tomorrow may doom!
Pros of leasing commercial space
1) Good working capital for running the business
If you’re leasing out your commercial space, no large funds are tied up in the market as it would be the case in case of buying a commercial space. This leaves you with a good amount of working capital and this money can be used for better running your day to day business transactions.
2) Prime office space
Leasing the commercial space is the best option for such businesses which require a good location for the business.
In other words, if your business depends on a lot of foot traffic where your office is located, then leasing out might be the best option for you! The best example of this is restaurants, cafes or pubs.
These businesses are mainly dependent on the location of your business. And if you have to buy the property in such prime areas, it’ll surely cost you a huge amount of money and might not justify the high cost of upfront capital and could seriously jeopardize running cash flows .
So what’s the easiest resort? Lease it on!
3) More time can be given on running the business
When you’re buying a commercial space, it’ll come along with a lot of headaches ranging from signing the deed to verifying the title of the property and so on.
This will make many business owners divert from the primary objective of running the business and shift their focus towards an investment!
But when you’re leasing out your property, you can rest assured that no such headaches will have to be faced by you and you can easily focus on bringing more business to your company!
That’s the primary motto, right?
Cons of leasing commercial space,
1) No fixed costs
Leasing out a commercial space means that you’ll be having no fixed costs that need to pay off every year.
The lease fees are often subject to an increase in the coming years. So you’ll end up paying an increased amount of rent every year which adds to the pressure of bringing in more business every year.
2) No equity benefits
In case of leasing a commercial space, you shall not have any retirement benefits like you would have in case you bought the property.
The benefits of appreciation in the value of your real estate property can also be not taken into account. You can reap no fruits of having the property for long periods of time running your business. The day your lease expires, or you plan to take your business elsewhere, there is no intrinsic equity that you take along with your business.
3) Lock in periods
Most of the lessors have the system of lock in a period, wherein the lessees are not allowed to vacate the property at their disposal.
Usually, the lock-in periods range between 3 to 5 years. If you learn that your business is not doing good during this time, and want to vacate the property so as to lease another property in other location, you will be required to pay huge loads of penalties.
Thus leasing out will obstruct your freedom of movement and flexibility of changing the business location.
This is especially true in worst case scenarios where the location of your business is doing more harm than good and you ‘have to’ vacate the place.
In case you had bought the property, it wouldn’t have been a huge loss because you could get away by just selling your property and buying another one (In the cases of extreme worst case scenarios where the location of the property is the biggest reason for business failure).
Thus if you’re leasing out the property, you’ll have less flexibility in this regard if things did t work out the way you wanted them to!
There you have it, we reviewed the major pros and cons of buying and leasing a commercial real estate property. Weighing these pros and cons in the light of your own risk-taking capacity, the nature and size of the business is a very important consideration and it is an important factor since it will help you decide which option is a better one for you! Taking the help of commercial placement advisor is a smart move! Isn’t it always better to take an expert opinion than regretting later for not doing so? So hire a real estate financing advisor today and make no mistake in the decision of buying or leasing out your commercial property!
