Buying vs. Leasing: A Guide to Commercial Real Estate Decisions

You will require some kind of space to carry out your business operations, store inventory, or manufacture your goods unless you are running a home-based business. You can either lease or purchase commercial real estate to fulfill this purpose.

Both the choices have benefits and drawbacks. Deja Vu real estate, a property investment company, puts together this guide to explain leasing and buying, along with their respective benefits and drawbacks, so you can make the best decision for your company. 

Why Should You Lease or Purchase Commercial Real Estate?

“When is it appropriate to purchase or lease commercial real estate?” is the first question you might have. Here are a few reasons why you might want to:

• You want to grow the home-based business you’ve been running.
• To keep inventory or raw materials, you require warehouse space.
• You intend to start a new retail location or expand your current retail business to new areas.
• There isn’t enough space for the extra employees you need to hire to accomplish their jobs.

It makes sense to either lease or purchase commercial property for your business if you are unable to use residential property for business reasons.

Pros and Cons of Leasing Commercial Real Estate

You should consult property management services for knowing all of the advantages and disadvantages of leasing commercial real estate before deciding to lease.

Advantages of Leasing Commercial Real Estate

• Liquidity: Leasing commercial real estate does not need you to save money for a down payment. You will therefore have more cash on hand than if you had purchased real estate for your company.

• Maintenance: If you have a lease, you will not be responsible for routine upkeep or repairs on the property. Alternatively, you could phone your landlord.

• Flexibility: In general, getting a business lease has fewer criteria than applying for a loan to purchase commercial real estate. It’s also possible that you could be able to afford to rent a space that would otherwise be too costly for you to buy because you won’t have to worry about making a down payment.

Disadvantages of Leasing Commercial Real Estate

The following are some possible drawbacks of opting to lease rather than purchase commercial real estate:

• High Rent: Rent for commercial real estate can be quite high, even higher than the monthly payment on a mortgage.

• No appreciation or equity: Rent payments are not cumulative unless you sign a lease-to-own agreement that allows you to apply a portion of your rent payments towards the eventual purchase of the subject property. Rent is not applied towards equity development.

• Lack of stability: You won’t have the same degree of control over the property you rent as you would if you own it, even if your lease arrangement will offer you some protection. When your lease expires, your landlord could raise the rent. If your company fails, you might still have to use your own funds to pay the rent even if they decide to sell the property.

• No rental income: Unlike in the case of ownership, as a lessee, you will not be able to rent out space that you are not utilizing.

In certain circumstances, the tax benefits of leasing might balance out the high expense of leasing and some of the other drawbacks we’ve mentioned here.

Pros and Cons of Purchasing Commercial Real Estate

Using a business loan to purchase commercial real estate has its pros and cons, much like leasing.

Pros of Buying Commercial Real Estate

The following are some benefits of buying commercial real estate as opposed to renting it:

• Equity: You will immediately possess equity in the property you purchase because commercial real estate loans need a minimum 20% down payment, and you will continue to accrue equity as you make loan payments. Having equity in your home makes it simpler to borrow against it, restructure your loan, and sell it for a profit.
• Capital gains: When you sell real estate, you could be able to make money and realise capital gains since the asset appreciates in value.
• Benefits in Taxes: You can lower your tax burden by taking advantage of interest deductions, property tax deductions, and depreciation even if you are unable to deduct your whole mortgage payment.
• Rental income: Any commercial property you own must be occupied by you for at least 51% of the time; however, you are free to rent up to 49% of the property in order to raise revenue and pay off your debt. Property investment companies can help you with it.
• Autonomy: You have the authority to manage commercial property as its owner. You are free to upgrade or renovate as you see fit. Additionally, unlike when you have a lease, you won’t have to worry about rent increases.

Drawbacks of Purchasing Commercial Property

The following are a few possible drawbacks of purchasing commercial real estate:

• Financing: Any prospective lender will want proof that the property you are purchasing will bring in enough money to cover the loan balance. A debt-service coverage ratio of 1.25 is one example of this.
• Initial expenses: Purchasing commercial real estate entails substantial upfront costs. You will be in charge of paying closing costs, appraisal fees, property insurance, and loan origination fees in addition to providing a down payment of 20% or more.
• Personal guarantee: In certain circumstances, you can be asked to sign a personal guarantee, which means that in the event that your company fails, you will be responsible for repaying the commercial loan.
• Liability: If someone gets hurt on your property, you are accountable for the consequences. This implies that in addition to liability insurance, you’ll also need to purchase supplementary insurance to cover you as a property manager if you rent out a portion of the property.
• Penalties for Early Payments: Make sure to carefully review the tiny print of your loan agreement as prepayment penalties and fees are frequently included in commercial real estate loans.
• Lack of liquidity: You should anticipate experiencing a loss of cash because purchasing commercial real estate entails significant upfront fees, which could limit your ability to take advantage of possibilities. It is imperative that you take into account the potential for your property to depreciate over time.

Wrapping Up

When choosing between purchasing and leasing commercial real estate, it’s critical to weigh all of the potential consequences. Deja Vu real estate is your trusted partner in helping you choose the right property based on your needs. Our real estate experts help you with professional property management services to ensure sustained growth and success. Moreover, we offer a selection of properties to choose from.