Is it Better to Lease or Buy Commercial Property?

Posted in Tips

Whether you’re just starting a business or are moving from your home to an office, the decision whether to lease or buy can have significant consequences. Factors to consider include costs, equity, flexibility and others. Let’s examine whether it is better to lease or buy commercial property.

Costs

Lease

With a lease, you’ll generally have a fixed monthly payment over the duration of the lease. However, you may be subject to rent increases upon renewal.

Buy

There are often high upfront costs associated with purchasing commercial property. These include a down payment, appraisal, property improvement and other relevant costs.

Over the long haul, you may be able to lock in a fixed mortgage rate, which will give your small business fixed monthly costs. This could be beneficial when compared to leasing, as you won’t have to deal with rent increases.

Equity

Lease

When you lease, you don’t gain any equity. As a leased property belongs to the landlord, you – the renter – will fund his or her bank account. It’s just like renting an apartment: when you leave, you do so empty-handed and the landlord retains ownership.

Buy

If you buy commercial property, you’ll benefit from any gains in it’s value. Then, whether you decide to go out of business, retire or just sell it to someone else, you can liquidate this asset and reap the rewards.

With the potential benefits, keep in mind that you’ll also expose yourself to potential losses in value. So, if you purchase commercial property for $300,000 and the local economy plummets, you could end up paying more than it is worth.

Flexibility

Lease

A lease is as flexible as the lease agreement allows. For example, if you sign a 1 year lease, you are free leave without any further obligations after a year.

Buy

A purchase of commercial property could be less flexible than a lease. If your small business needs or could benefit from a change of location, you may have to deal with market conditions, realtor fees and associated hassles to make a move.

Alternatively, you could rent your property to another business. Doing so could help you ride out a weak market, as you could rent out the property, generate some income and sell it when the market picks up.

In any event, you’ll have more strings attached when buying versus leasing.

Repairs

Lease

Depending on the terms of your lease agreement, repairs may be covered by the landlord. If this is the case, your exposure to repair costs will be reduced or eliminated. Still, the landlord may factor this in with your rent payments, so the news is not all good.

Buy

As the owner of commercial property, repairs will be on you or the insurer that you pay to handle them. If you pay out-of-pocket, you’ll expose yourself to potentially high repair costs. If you pay an insurer, a boatload of repairs could raise your premium.

Is it Better to Lease or Buy Commercial Property?

There is no one-size-fits-all answer to this question.

A commercial lease will offer less risk, but it will also result in no equity. Buying commercial property will be riskier and have more strings attached, but could pad your wealth if things work out. So, conservative business owners may wish to go with a commercial lease while those who roll the dice may wish to go with a purchase. Either way, give this decision careful consideration and seek advice from trusted colleagues and professionals.

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