When the time comes to acquire an industrial or commercial property, a business owner has two main options: they can buy the property outright, or they can lease it. There are pros and cons to buying vs leasing industrial commercial property. The right decision for your business will depend on a variety of factors. Here, we take a look at the key advantages and disadvantages of each option to help you decide which is best for your business.
At Tolj Commercial we understand that there is no one-size-fits-all answer when it comes to buying or leasing property. The right decision for your business will depend on your individual circumstances, goals, and budget. Our experienced team can provide you with expert advice to help you make the best decision for your business.
When making the decision on whether to buy or lease a commercial property, it’s important to keep in mind your specific needs and goals. Leasing a property may give you more flexibility and freedom to move in the short term, but buying a property can provide long-term stability and potential growth.
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Key Takeaways
- Buying commercial property involves significant upfront costs and potentially ties up capital that could be used for other business investments. Leasing, on the other hand, generally requires less upfront capital and can provide more flexibility for allocating resources.
- Ownership of a property provides greater control over the premises and stability for business operations, but it comes with responsibilities such as maintenance and management costs. Leasing, while offering less control, usually transfers maintenance responsibility to the landlord and offers more flexibility in terms of relocation.
- Buying can result in long-term financial benefits through asset appreciation and potential rental income if the property has extra space. However, it also carries market risks. Leasing provides flexibility and can be a good short-term option, but it doesn’t build equity and can potentially result in increased costs due to rent hikes.
Pros of Purchasing Commercial Real Estate
1. Build Equity
When you buy a property, you are building equity. This can be a major advantage if you plan on selling the property in the future. If you pay for 100% of your property upfront, you will own it outright. You can renovate the property to increase its value thus increasing the equity you have in it. In addition, appreciation of the value of the investment property will also increase your equity.
2. Control of the Property
When you own the property, you have complete control over what happens to it. You can make any changes or renovations you deem necessary without having to get approval from a landlord. This can be very important for businesses that require specific modifications to their premises in order to operate effectively.
3. Predictable Costs & Stability
Once you own the property, your monthly costs will be predictable. You will no longer have to worry about rent increases, as your only major expense will be property taxes and insurance. This can provide peace of mind and stability for business owners who like to budget and plan ahead. In addition, commercial real estate loans typically have longer terms than leases, which can further stabilize your monthly costs.
4. Tax Benefits
Another advantage of buying property is that businesses can claim a range of tax deductions, including interest on your commercial real estate loan payment, depreciation expense, and other non-mortgage-related expenses. Talk to your accountant about how to best take advantage of the tax benefits and tax breaks associated with owning your own property.
5. Income Potential
Another key advantage of purchasing commercial real estate on your own property is that it can provide an extra source of rental income. If you have space that you’re not using, you can rent it out to other businesses. This can help to offset the costs of ownership and potentially generate a healthy return on investment. In addition, rental income can provide a cushion in the event that your business experiences tough times and is unable to cover the commercial real estate mortgage payments on its own.
Cons of Buying
Significant Upfront Cost
The biggest disadvantage of buying property is the significant upfront cost. In addition to the purchase price of the property, you will also need to pay for closing costs, legal fees, and any necessary renovations or improvements. This can be a major financial burden for businesses, particularly small businesses, and startups that may not have a lot of cash on hand.
Under-Utilized Space
Another potential downside of owning your own property is that you may have a lot of space that you’re not using. This can be wasteful and costly, as you will still be responsible for paying property taxes, insurance, and other expenses even if the space is vacant.
Tight Cash Flow
Another consideration is that buying a property can tie up a lot of your capital, leaving you with less cash on hand to grow and expand your business. This can be a major problem for businesses that rely on having a healthy cash flow to operate effectively.
Responsibility for Repairs Maintenance and Taxes
As the owner of the property, you will be responsible for all repairs and maintenance. This can be a major expense, particularly if the property is older or in need of significant repairs. In addition, you will also be responsible for paying property taxes, which can add up over time.
Pros of Leasing
No Down Payment Required
One of the biggest advantages of leasing is that it requires little to no upfront investment. In most cases, all you will need to pay is the first month’s rent and a security deposit. This can be a major advantage for businesses that don’t have a lot of cash on hand or that need to preserve their capital for other purposes. For instance, businesses that are expanding or investing in new equipment may prefer to lease rather than buy a property.
Access to Desirable Areas
Leasing commercial real estate can also provide access to prime locations that may be out of reach for businesses that are buying. Oftentimes, the areas you leased could be more developed, which means less cost than purchasing and developing your own property. This can be a major advantage for businesses that want to get up and running quickly without incurring a lot of upfront costs.
Maintenance And Repairs Are Handled By The Landlord
Another key advantage of leasing is that the landlord is responsible for all repairs and maintenance. This can be a major benefit, as it can save businesses a lot of time and money. In addition, if something goes wrong with the property, you may be able to get out of your lease without penalty.
Tax Benefits Potential
While there are tax benefits to purchasing and leasing industrial commercial property, it’s important to talk to your accountant to see how you can best take advantage of them. You may be able to deduct the cost of your entire lease payments, property insurance, and other related expenses from your taxes.
Cons of Leasing Commercial Real Estate
There Is No Investment Potential
One of the biggest disadvantages of leasing is that there is no potential for investment. Unlike owning a property, you will not build any equity in the property while you lease it. This can be a major downside for businesses that are looking to invest in commercial real estate. The investments you make to improve the property will not increase your equity, since you do not own the property.
You May Not Be Able To Customize The Property
Another potential disadvantage of leasing is that you may not be able to customize the property to suit your needs. For instance, if you want to make changes to the layout of the space or add special features, you will need to get approval from the landlord. This can be a major problem for businesses that have specific needs for their space.
The Landlord Could Raise The Rent
While the landlord is generally required to give you advance notice before increasing the rent, there is always the possibility that they could raise the rent sooner than you expect. This could cause problems for businesses that are on a tight budget.
You Could Be Forced to Move
If the landlord decides to sell the property, you could be forced to move. This can be a major inconvenience for businesses that have invested time and money in customizing their space. In addition, if the new owner decides to redevelop the property, you may be required to move even if you have a lease.
Property Control Is Not Available
Another potential disadvantage of leasing commercial real estate is that you will not have control over the property. The landlord will be responsible for making all decisions about the property, including repairs, renovations, and changes to the common areas. This can be a problem for businesses that want a say in how their space is used.
Should You Buy or Lease Commercial Property?
Now that you know the pros and cons of leasing vs buying industrial commercial property, you may be wondering how to decide which option is right for your business. Here are a few tips to help you make the decision:
- Talk to your accountant to see how leasing or buying will affect your taxes.
- Consider the amount of money you’re willing to invest in commercial real estate.
- Think about how long you plan on staying in the space.
- Determine whether you want the flexibility to customize your space.
The Bottom Line
When it comes to growing your business, it is essential to acquire commercial real estate. The decision of whether to buy or lease should be based on your specific needs and goals. If you are looking for a long-term investment, purchasing commercial real estate may be the right choice. However, if you need flexibility or are working with a limited budget, leasing may be a better option. Ultimately, the best way to decide is to consult with your accountant and real estate advisor to see what makes the most financial sense for your business.
If you want additional help, be sure to in touch with a trusted commercial real estate broker that can help you do a lease versus purchase analysis to figure out what is best for you. I’d be happy to help! Please contact me today to get started.
