Buying vs. Leasing Commercial Real Estate: The Pros and Cons
Which is better, buying or leasing? As a business owner, you need to consider various factors before deciding which approach will work for you. Generally, your decision comes down to the amount of money you will be spending or saving. But figuring out where those savings come from is the tricky part. You must consider many things, including the stage of your business, monthly payments, financing options, and cash flow. This article will discuss the factors you need to consider before leasing or buying a building.
Monthly payments vs. cashflow
Before you decide to lease or buy a building for a business, consider how much money the business brings in compared to your projected monthly payments. You’ll want to avoid overstretching your budget or else you’ll risk facing negative consequences due to default payments. You need to follow through with your monthly payments without crippling your business operations, so the option you go for should reflect the status of your finances. Leasing can sometimes be cheaper than ownership, so although you’re not building equity with a lease, you’re keeping costs as low as possible.
Landlords and property managers will have specific terms for their leasing and buying clients regarding maintenance. The monthly payment for maintenance depends on the lease agreement you sign before moving in. Since a buyer is a building owner, buying clients have no option but to pay for regular maintenance costs out of pocket. Before you buy a building, consider whether you can pay the monthly bank payment plus maintenance fees. Otherwise, consider a lease.
A tenant can often use fixtures and appliances in a commercial building but can’t take the equipment with them when they finish the term of the lease. Even when a landlord installs equipment to enable the client to do business smoothly, the equipment remains the property of the building owners. If you foresee your business moving in the short term, consider buying necessary equipment or purchasing the building outright.
Whether your business grows or shrinks, it is important to ensure that the agreement you have meets the future needs of your business. Does your current space allow your business to expand and grow in the future? And in case all does not go well, are you at liberty to degrade without facing penalties? A lease will give you more flexibility if your business is in a period of rapid growth.
Compare the savings you are going to make leasing versus buying. Ask your commercial real estate agent to show you multiple properties for sale or lease. Try to figure out the average price for both options and use that information to make an informed decision. Depending on the option you go for, you could save on the initial down payment, recurrent monthly rent payments, lease payments, tax deductions, and liability insurance.
The pros and cons of buying commercial property
Check out the advantages and disadvantages of buying a building:
It is an extra source of income
You can start earning rental income immediately when you become a commercial building owner. If you are not using all the space available, you can rent it out to other business owners and make extra income from the monthly rent payments.
You have more control of the building
As a commercial building owner, you have more control over what happens inside. You set the rules and can make key decisions about how you use the space. A landlord can’t restrict you from running your business how you want because you have the final say, as long as it is compliant with the state laws.
The premise’s value keeps going up
The good news is that, for the most part, property values appreciate. The longer you remain a landowner, the more money you make. If you decide to lease part of your property to other businesses, you can revise your lease terms and increase rents according to the lease agreement you have with the tenants. You can also decide to sell the building later and earn a profit to buy a new one at a better location.
The equipment in the building is permanently yours
All the fixtures you install in the building for your tenants or business will be permanently yours. They could add value to the building and even bring you more money.
Disadvantages of buying instead of leasing:
You must pay the down payment
If you are buying an office or commercial building, you need first to make a down payment. Just like auto loans, these down payments usually range from 15%-30% of the building’s entire purchase price, especially if you want a loan to finance it. This money can be a lot for a small or growing business, making it almost impossible to own if your margins are thin.
You could lose your capital trying to own the building
You may be forced to use business capital to make a down payment for the building. Most business owners will take out a loan to finance the purchase. However, you may stretch yourself too much to meet these debt obligations, and this can impact your available credit when you go to purchase future items.
Buying a building, just like buying a car, adds to your monthly costs. Since you are the new building owner, you must meet all other obligations such as liability insurance and property insurance. You must incur all charges to protect your tenants from accidents, damage, and natural disasters. To lower monthly payments for the building’s maintenance, you may have to pass on some monthly costs to other tenants. Even though the property value keeps rising, you will need to regularly maintain the building after every few years to maintain its curb appeal.
The pros and cons of leasing
Check out the advantages of leasing:
Fixed monthly payments make it easy to plan your financial future
You will receive the payment terms before moving in when you sign a lease document. Your monthly rent payment remains fixed during the lease term so that you can plan for your business expenditure early on.
Your business does not have to make a huge down payment when leasing. As a tenant, you only need to pay the agreed-upon rent and a refundable security deposit, then move in. The low monthly payments leave you with disposable income for business operations.
It is easy to qualify for a lease
Most leases don’t have as stringent requirements when compared to buying. As long as you comply with the state laws and meet the lease terms, you are good to go.
Disadvantages of leasing
Lease payments do not qualify you as an owner
You still won’t qualify as an owner after many years of paying the monthly rent and renewing the lease agreement. Even if you pay as much money as the price of the building, you will move out one day and leave it behind along with your entire investment.
You have no control over tenancy agreement restrictions
Tenancy agreements are drafted by the landlord or property managers. These agreements often put restrictions on various business operations and space usage. Tenancy agreements can restrict you from multiple activities and alterations. This lack of freedom could severely impact your business.
Higher monthly payments
In the long run, rent payments are costly. You will find that in 10 or 20 years’ time, you have paid enough rent to own that building – but it still belongs to another person. In addition, at the end of the lease term, you will pay the wear and tear charges from your security rent deposit. Also, early termination is very costly and can eat into your profits.
Looking for business properties in West Virginia? Call us now for a free consultation
It’s not easy to decide whether to buy or lease a commercial property in West Virginia. You need financial planning advice to make the right decision for your business. Depending on the stage of growth you are in and the amount of disposable income you have, the real estate experts at The PM Company can help you find the ideal property for you. We have properties available across West Virginia and can grow with you whether your goal is to lease or buy. Call 1-304-485-8000 today for a free consultation.