Business people often wonder if it is better to buy or lease a commercial property. Naturally, the main thing on their mind is the cost. To better make a decision, you should analyse a number of factors. These should account for the up-front costs, monthly ongoing costs, the savings in taxes, the amount of equity in the building, or what can be earned if the property is sold.
Do You Need a Space for Your Business?
If you are buying or renting a space for your business operations, you also need to review the following:
- Is it likely that you will outgrow the space?
- What are the local trends in the commercial real estate market?
- Would you rather enjoy the stability of a mortgage or the flexibility of leasing?
- How much liquid capital can you put into the real estate?
- Do you want to assume the obligations associated with maintaining a property?
All the above-listed questions should be answered if you are looking at commercial property for sale and rent. Each business owner’s situation is different. Also, leasing contracts for commercial buildings can be customised to the needs of the tenant. You do not have this type of latitude if you are leasing a residential property.
Building Equity in Your Property
Like buying, commercial leasing has its advantages, too. For example, buying a commercial building enables you to build equity. The monthly payments you assume go toward paying the principal on the loan. When you finally refinance or sell the real estate, the difference between the remaining loan amount and the current market value of the property can be applied as business equity.
Paying lease payments differs from owning a commercial property, as the payments are directed to a landlord and you do not have to provide a down payment. However, the fact that you can build equity in a property you purchase makes buying more advantageous in this respect. You can also realise asset appreciation and can rent the property too, if you so choose.
Do You Have Upfront Capital?
Nevertheless, leasing is often beneficial to business people who do not have the upfront capital for a real estate purchase. Also, if you own instead of lease a property, you assume an increased risk. For instance, if you decide to rent the property to others, your liability is increased. As a result, you will need to pay extra for insurance cover to reduce the risk.
More Liquidity and Flexibility
Should you choose to lease, you will realise more liquidity and more flexibility. However, whether you rent or buy, you will receive tax benefits. Therefore, again, the decision you make is dependent on your goals for expansion and your current access to capital.