Buying vs Leasing Commercial Real Estate

There are many benefits to buying a commercial real estate property versus leasing one. When you lease, you end up paying more over the long run and with less flexibility than if you buy it outright. However, there are also potential risks that go along with leases that owners need to be aware of when deciding what type of deal is best for them..

The “lease vs buy commercial real estate calculator” is a tool that helps you decide whether to lease or buy property.

You must determine whether to purchase or lease commercial real estate when your company chooses to acquire it. When you purchase a home, you have the option of paying cash up front or financing the cost of ownership. You acquire the property entirely after the payment is received in full. You’re paying for the right to use the property for a certain length of time when you sign a lease. You must negotiate the right to continue utilizing the property at the conclusion of that period.

South End Capital is a great option if you’re searching for a commercial real estate loan. Commercial and investment residential homes, rural settings, special-purpose properties, and even land loans are all available via South End Capital. For additional information, go to South End Capital’s website.

A side-by-side comparison of purchasing vs leasing commercial real estate may be seen in the table below:

When Should You Buy Commercial Real Estate?

Whether you pay cash up front or finance the acquisition with a commercial real estate loan, purchasing commercial real estate gives you ownership of the property. The following are some advantages and disadvantages to consider while buying commercial real estate.

Advantages of Buying Commercial Real Estate

Investing in the Property and Building Equity

When you buy a house, you have the option of earning equity in it in a few different ways. If you used a loan to finance the property, the property will gain equity as you return the debt. The value of the property will grow as a result of repairs or additions, boosting the equity. The advantages of equity in a commercial real estate lease accrue to the landlord rather than you.

Appreciation of Assets

Improvements to the property will not only boost its equity, but also its worth. The property’s value will also rise due to the overall appreciation of the commercial real estate market. Commercial property prices have climbed by 21% in the past year, according to greenstreet.com.

Rental Possibilities

While most firms who buy commercial real estate do so with the intention of using at least 51% of the space, the remaining space may be leased out. This will bring in rental money, but it will also mean that you will be liable for the tenants that rent the space as a landlord. You may also engage a property management firm, but this will eat into your rental income even more.

Benefits from Taxes

You may deduct interest, depreciation, and other non-mortgage-related costs from your taxes. Always contact a tax specialist for further information on how to get the most out of your commercial real estate purchase.

The Drawbacks of Buying Commercial Real Estate

More Expenses Up Front

When you buy instead of lease, you’ll likely spend up to six times as much money up front owing to down payments, closing charges, and due diligence fees. Most lenders will want a down payment of at least 10%, but it might be as much as 40%. To make the deal, your organization will need liquid funds up front.

Enhanced Liability

You are accountable for the health and safety of the individuals who are within the building since you own it. You’ll also be responsible for the building’s upkeep and repairs. If you rent out other parts of the building, you’ll be responsible for them as well, necessitating the purchase of extra insurance.

Depreciation Threat

While the rise in commercial real estate prices has given building owners with more equity and value, the rise may not be sustainable. Many analysts anticipate that a real estate market correction will occur in the next months, causing your home to depreciate solely due to market circumstances rather than anything you did with it.

Inability to Move Your Business Due to a Lack of Flexibility

One of the most significant benefits of a lease is the flexibility to not renew at the conclusion of the term and move into a property that better suits your company’s current demands. When you own the land, it might be tough to sell and move into a new facility, whether your firm is expanding or contracting. In contrast to lengthier mortgage terms of 15 to 30 years, three-year lease durations allow you to review your company demands more often.

When Should You Consider Leasing Commercial Property?

Depending on your company’s demands, leasing rather than buying commercial real estate may be a better option. When leasing commercial real estate, there are several factors to consider. The chart below lists some of the benefits and drawbacks of leasing commercial real estate.

Advantages of Commercial Real Estate Leasing

Increased Liquidity

You’ll need significantly less money up front for a lease than you would for a business real estate acquisition. A security deposit, pre-lease inspection, legal costs, and perhaps a broker’s charge will all need funds. These total expenditures are much lower than the amount required for a purchase, implying that you will need less of your liquid resources to acquire the property.

Potential Benefits from Taxes

Benefits from Taxes are something that both real estate purchases and leases share. However, the benefits they share are different. With a lease, you should be able to deduct lease payments, property taxes, property insurance, and utilities and maintenance. Again, consult your tax professional for more information on the Benefits from Taxes of a commercial real estate lease.

Increased adaptability

You have more freedom with a lease than with a 15- to 30-year mortgage since lease lengths range from three to ten years. It enables you to exit a development and enter a new one that better suits your evolving company demands. Furthermore, it may enable you to lease a building that you cannot afford to buy right now but may be able to buy a few years down the road.

Getting Into Existing Development Is Easier and Less Expensive

If you want to move into a building that is already part of a development, it will probably be simpler to lease one of the buildings from the property management firm rather than attempt to purchase it. It’s possible that buying the building isn’t even an option. A lease may help you get your company into a great location that might otherwise be out of reach since a building isn’t for sale.

Cons of Commercial Real Estate Leasing

There is no potential for investment.

You won’t profit from the building’s price appreciation if it sells since you don’t own it. You won’t be able to generate equity in the property, which limits your earning potential as compared to a home you own. You will also be unable to make rental money. When compared to a commercial real estate acquisition, these are the hidden expenses of a lease.

Increased Monthly Payments

Your monthly lease payment may be larger than a mortgage payment since a commercial real estate mortgage may be extended out for up to 30 years. Tenants are required to pay monthly property taxes, retail insurance, utilities, and maintenance charges under certain lease arrangements, such as a triple net lease agreement. These factors also raise the cost of a lease when compared to a mortgage for a buy.

There is no control over the property.

Because you don’t own the property, your landlord will make important choices that will have an impact on your company. Escalator provisions in lease agreements may result in increasing lease payments each year of the term. Also, certain stipulations in your lease agreement, such as the departure of an anchor tenant, may result in a lease termination. This creates much more uncertainty in your company than a direct acquisition would.

When a lease is renewed, costs may rise.

When it comes to leases, the most unpredictability occurs near the conclusion of the period. On a new lease, the landlord has the ability to drastically raise the monthly rent, which you may not be able to afford. They may even opt not to renew the lease, leaving you rushing to find a new home.

Conclusion

Acquiring commercial real estate is a huge step in developing a business. Once you decide to begin the acquisition process, you must consider the pros and The Drawbacks of Buying Commercial Real Estate compared to leasing. There’s no blanket right answer for businesses. You must assess your needs, your business’s financial stability and liquidity, and your short- and long-term business plan to decide which path is best.

Check out our financing guide for more general information on how to secure a small business loan if you decide to buy commercial real estate. You may also look for the most recent commercial real estate loan interest rates.

Buying commercial real estate is a lot more expensive than leasing. A buyer will have to pay the price of buying, as well as the price of renting for the duration of their lease. The cost of buying property is a lot higher than leasing because it includes all the upfront costs that are associated with purchasing a property. Reference: how much does it cost to buy commercial real estate.

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