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Buying vs Leasing Commercial Property

Posted by Jake Cook on May 7, 2021
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Buying commercial property vs. leasing is a major decision that many business teams need to make. Each option can offer some significant advantages, and there is no simple, one-size-fits-all answer. Fortunately, Unique Properties, Inc. can help you regardless of whether you choose to buy or lease. The following information will help you to decide on the right course of action for your business.

The Importance of Choosing the Right Real Estate Path

Real estate can be a major expense for your business, no matter whether you buy or lease. Each option can have different implications for your cash flow, stability and long-term prospects. Buying and leasing also have tax impacts. So, it is worth spending some time to consider which is the best path for you.

Advantages of Buying Commercial Property

Buying your commercial property can be an attractive option in many cases. It puts you in more control because you won’t have a landlord. However, most businesses do not purchase their real estate outright. Instead, they use a loan to spread out the cost. These are some of the benefits of buying property:

  •         Building Equity in an Asset: As you pay off the loan, you will gain equity in the commercial property. This will increase the assets on your balance sheet. You can potentially use that equity in the future as collateral or for other business needs.
  •         Finite Number of Payments: From a long-term cash flow perspective, buying can be an attractive option. Eventually, you will completely own the property. For certain types of businesses, this can lead to financial security.
  •         Greater Control: When you own the building, you don’t have to answer to a landlord. You are completely in control and can keep the property for as long as you can afford it. There is no risk of a rent increase or being asked to vacate.
  •         Possibility for Rental Income: You can potentially lease part of your property to tenants. This is common when a business buys a larger property than is needed immediately.
  •         Deductible Depreciation and Interest: There are some tax benefits to buying. Noticeable, you can deduct expenses such as interest and depreciation (if relevant).
  •         Asset Appreciation: Real estate can appreciate in value. This is not guaranteed by any means. However, the overall real estate market tends to gain value over time. So, you may end up owning an asset that is significantly more valuable than it was when you purchased it.

Things To Know About Financing

If you are expecting to buy your property, you should know a few details about commercial real estate financing. These are neither advantages nor disadvantages. However, they are important to know.

First, keep in mind that there are many options. You can get a commercial mortgage through a bank, a hard money loan, seller financing, and several other types of financing. Second, it is helpful to know that some commercial real estate loans have balloon payments at the end, a characteristic not often seen in residential mortgages.

Advantages of Leasing Commercial Property

Leasing is also a good option in many cases. Overall, it allows you to remain much more flexible than buying. However, it also means giving up a little bit of control. The following are a few of the advantages of leasing a commercial property:

  •         More Flexibility: When you are leasing a space, you aren’t tied to it. While your commercial real estate loan could have a term of 10 years or more, your lease may only have a term of a few years. Plus, you can typically break leases more easily if necessary.
  •         Reduced Upfront Costs: The upfront payments on a leased space are usually a few months of rent plus some renovation/setup costs. This is much lower than the down payment on a loan.
  •         Tax Benefits: There are tax benefits for costs associated with leases as well. Typically, you can deduct the entire lease payment because it is an expense.
  •         Landlord Handles Many Costs: Your landlord will typically handle costs such as repairs and maintenance. Similarly, upkeep for common areas is usually covered. This can simplify your overall budgeting.
  •         Fixed, Monthly Payments: With a lease, you know exactly what the costs will be each month. The only variable tends to be utilities. Many business teams find this easier to work with.

Deciding Whether To Buy Or Lease Your Property

Choosing between buying vs leasing commercial property can be a big choice. In either case, you are likely determining what property your business will use for at least several years. The correct choice will depend significantly on the unique circumstances of your organization.

Situations That May Benefit From Buying

Often, businesses choose to buy property when they want the long-term stability of owning the space that they are working in. If you anticipate using the property for years to come, it may make the most sense to purchase it and build equity.

Additionally, some teams choose to buy their commercial property because they want to use some of it to generate rental income. Keep in mind that if you are inhabiting less than 50% of the property in many cases, it may be considered an investment property. This can have implications for your loan and taxation. Make sure to fully understand the relevant laws and lender rules before you make a decision.

Sometimes businesses choose to buy property because they want more control over how it will be set up. If you want to build a purpose-designed facility on the property, you may need to purchase it. Conversely, if you want to set up a more standard office or storefront, leasing may be sufficient.

Situations That May Benefit From Leasing

Business owners may choose to lease when they think they may move out at the end of the lease. This may be the case for a new business that isn’t firmly established yet. It may also be the case for a growing business that may need additional room in the near future.

Some business teams choose to lease because they want to keep as much cash available for other purposes as possible. The down payment on a commercial loan can have significant opportunity costs. Furthermore, the costs associated with maintaining a property can require having cash reserves available. In short, leasing can be helpful if you want to keep your money available.

Finally, you may consider leasing if you want to locate your business in a space that you would otherwise not be able to afford. For example, you may want to use a storefront in a high foot traffic area. This can be very expensive, and leasing may be the only option.

Get Help Finding Your Ideal Commercial Property

Whether you decide to buy or lease commercial property, Unique Properties, Inc. can help. We provide brokerage services to landlords, tenants, buyers, and sellers. Contact us today to learn more about our services. We will help your business find the right commercial real estate opportunities for your needs.

Featured Image: Maria Vonotna/Shutterstock

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