Buying or Leasing? Which Commercial Property Option Is Best

Commercial Property

If you are interested in starting a business, finding the right property should be your first order of business. One conundrum is figuring out whether you should buy a property outright or lease it from the current owner. The best way to determine whether buying or leasing is the most viable option for you would be to take a closer look at the advantages and disadvantages of each.

BUYING PROS

Rental Potential

Most people who buy commercial property for business use do not inhabit the entire space. This means that there is an opportunity to rent the remainder to someone else. If you are worried about paying a hefty mortgage, this will certainly help soften the financial blow. When it comes to leasing, any unused space cannot be subleased unless you get strict permission from the owner and this is not allowed in many cases.

Control

It is hard to run a business when you have someone else telling you what can and cannot be done. When you buy commercial property, you are in complete control of how things go. This means that you can do things your way without having to make concessions for anyone else. If you are someone who strongly values being in the driver’s seat, this is certainly a disadvantage.

Long-Term Savings

When someone is leasing a property to you, they will do so in an attempt to turn a profit. As a result, the amount you pay for rent will be a bit higher than you would pay if you applied for a mortgage. For example, a mortgage on a property may be around $5000 monthly as opposed to the $6000 a landlord would charge you in order to cover his mortgage and have a little money to spare.

BUYING CONS

Upfront Costs

One thing that many people dislike about the buying process is the amount of money you are required to come up with in the beginning. Not only will you have to worry about the down payment, but things like closing costs and inspection fees can make the total skyrocket in no time. In some cases, these costs lead to a business getting behind before they have a chance to start turning a profit.

Liability

If you buy a piece of property, you are responsible for the safety of everyone inside as well as the maintenance and upkeep that is involved. An example of this would be having to pay the medical bills of someone who slipped on your stairs. If you were leasing the property, this is something that the landlord would have to worry about.

Depreciation

Unfortunately, there are times when property values plummet. If you are in this type of situation and you are forced to sell, you will have to take a loss. It is really disheartening to take a chance on a real estate investment and you end up losing money instead of turning a profit. This is not something you would have to worry about if you were to take out a lease.

LEASING PROS

Upfront Costs

Just as you would when buying, you will be required to invest money up front in order to secure a lease. The difference is the amount of money that will be expected of you. Typically, leaseholders pay one-sixth of the amount people are required to have when they are buying. For those who do not have a ton of money on hand, this is definitely a better option.

Tax Benefits

When you have a lease, you can deduct the entire amount when you pay your yearly taxes. You can also deduct the amount you pay for property taxes, maintenance, utilities and insurance. While some of these can also be deducted when buying, the entire monthly payment is not included in this equation.

Flexibility

What happens if you purchase a small commercial space and your business does so well that you want to expand? You will be stuck trying to sell your current property and buy another. When you lease, you have more flexibility. Once your term is over, you can feel free to move without worrying about anything other than your next business location.

LEASING CONS

No Investment Potential

When you buy a place, you always have the opportunity to earn a return on your investment if the property goes up in value. This is not something that is available to those who are leasing. It is also not possible for you to act as a landlord and rent the property out if you decide that you no longer need it before the term is over. If your company does not do well and you are forced to close, you may still be on the hook for some of the monthly payments.

Payment Fluctuations

As inflation occurs, the amount that your landlord charges you monthly may increase. This means that what was once an affordable payment may balloon over time. When you have a mortgage, this is a fixed rate for the duration of the term. This means that you will have a predictable payment. This can be very concerning for someone who already struggles to make the monthly payment as it is.

Waiting For Maintenance

When something is not in working order, you will have to get in touch with the landlord and let them know. If they drag their feet, your business suffers in the meantime. On one hand, it is great that upkeep is not something you will have to think about, but you will have to rely on the dependability of someone else to ensure things run smoothly. Unfortunately, this can come back to bite you on the rear and hurt your business.

Trying to decide whether to buy property or rent is a serious decision that needs to be thought about thoroughly. Rushing in can leave you filled with many regrets. Keep all of the abovementioned points in mind as you weigh all of the pros and cons and determine which option will offer you the best outcome. And be sure to contact a real estate advisor such as Live Love at Home commercial real estate for more information.