Buying Vs. Leasing A Commercial Property
It can be challenging to determine which option works best for you and your business when it comes to the difference between buying vs. leasing commercial properties. Despite the evolution of virtual and home-based companies, most companies utilize commercial space of one kind or another to conduct business operations. These may include, albeit are not limited to, retail spaces, warehouses, factories, offices, etc. If you are starting a new business or expanding an existing one, you will have to decide whether buying or leasing is best for you and your business goals.
Buying Commercial Property
Several factors can impact your buying vs. leasing decision. Examples include associated recurring costs, tax factors, property value, down payments and repairs/maintenance, the latter of which will increase as respective property ages.
There are many upsides to buying a commercial property that can include the opportunity to build equity, asset appreciation, tax benefits, fixed rates/payments and the potential to earn rental income if you decide to take on tenants for extra space that your business doesn’t utilize. As the property owner, you will also have complete control of the space, making more efficient changes to fit your business needs. Similarly, you will make fixed payments that will generally not increase over time (unlike leasing). According to most commercial real estate professionals, despite the obstacles set forth by Covid-19, commercial properties will generate reasonable rates of return over the long term compared with many other investment alternatives.
While there are many upsides to consider when buying a commercial property, it is also essential to know the potential downsides of buying a commercial space. Buying a property may limit the physical expansion of your business, given the fixed size of the property purchased. As your business grows, so will your need for space. Leasing space gives you more flexibility for future expansion or contraction regarding the physical space needs of your business. You will also have to examine the upfront cost of purchasing a commercial space. These costs can include the down payment, appraisal fees/transaction costs, and increased liability (liability insurance). Particularly if your business is a start-up, you may not have the extra capital to invest in a commercial property purchase.
Leasing Commercial Property
Correspondingly, leasing a commercial property is certainly a suitable option when contemplating your buying vs. leasing decision. In terms of the benefits of commercial leasing, there are also some potential tax benefits, greater flexibility and no down payments when you lease. Contrary to buying, as indicated, you have more flexibility to relocate to alternative spaces as you enjoy business growth and expansion or contraction resulting from an economic downturn. Leasing is often a more viable option for new companies, small businesses or organizations that might not have the extra liquid capital as an established business.
However, there are downsides to leasing commercial spaces. Annual cost escalations are one of the most significant risks in leasing. Most leases have contractual fixed annual “cost of living” adjustments/increases in the rent. Also, once your original lease term is up (with any options to extend the lease), your landlord may decide to hike up the price based on market trends and growth. In recent years, the average percent increase has been around 3%-4% annually, for the cost of living adjustments, and higher increases are often demanded when leases become “out of the term.” Of course, as a renter, there is no investment opportunity associated with your lease. Hence, if you want to take advantage of the dual opportunity to secure the space your business needs and make a long-term investment, you are encouraged to buy commercial property.
What’s Next?
As indicated, there are multiple considerations to keep in mind when examining the ins and outs of buying vs. leasing. While both opportunities have upsides and downsides, different businesses will have separate wants and needs for their space. If you are considering renting or buying a commercial property, Tyler Duncan Realty Partners can assist you in making the right decision. Visit our website today to learn how we can help with this important and complex decision!