Commercial Real Estate: Buy or Lease?
Deciding whether to lease your property or buy it outright is one of the most important decisions a business owner can make, and frustratingly, there’s no easy answer as to which one is right. It’s up to you to do your homework and figure out which strategy is best for your unique circumstances. Start by asking yourself these questions to determine how to proceed.
What’s the long-term cost?
Cost isn’t just about how much you pay per month on a lease or a loan. There are many factors that affect the total cost of ownership or tenancy. For example, the general rule is that a security deposit for a rental property is usually cheaper than a down payment and interest on a loan, but if you need to make extensive tenant improvements to your space, it could be cheaper to build them into a loan and purchase the property outright. A fixed-rate loan also means your payments and interest rate will stay the same, whereas your landlord may decide to raise your rent when it’s time to renew your lease.
How long will you stay there?
If you’re not sure about a space’s long-term prospects, it doesn’t make sense to buy it even if the price seems low. However, if you’ve found the perfect location and have no plans to move, it might be better to buy it before costs go up any further.
Who pays operating costs?
Some lease structures tie rental costs to operating costs, which means a renter is essentially paying the same for utilities and repairs that an owner would without the security of owning a property. This is a case where purchasing a property puts you at an obvious advantage – leasing isn’t protecting you from an unexpected spike in electricity rates or the cost of plumbing work, so you might as well take out a loan and own your property outright instead of continuing to pay a lease forever. Alternatively, if your lease stipulates that your landlord is responsible for basic repairs and maintenance, it might be advantageous to continue leasing – not everyone wants to deal with the hassle of maintaining a space.
How much surplus space is there?
If you have the option to buy a floor or a building, but the space is too large for you, consider whether you’d be interested in renting out the extra space. Rental profits can become a sizable income stream, but renting out your extra space means that you’re also signing up to deal with typical landlord headaches like collecting rent and arranging for property maintenance. You can outsource those things to a third-party property management company, but that will eat into your profits, so it’s up to you to decide whether the rental potential is worth it.
How much will my tax benefits be?
Buying commercial real estate means that you get to deduct interest, depreciation and non-mortgage-related expenses, which can save a considerable amount of money when you consider that the average corporate tax rate is 35%. However, because you can only deduct the interest and not the expenses that are related to your mortgage (like closing costs, for example), the tax benefits of buying property are usually lower than leasing.