Should You Buy or Lease A Commercial Property?
It’s a well-known fact that any type of property, whether commercial or residential, can be a good investment opportunity. But for investors who are seeking cash flow, the commercial properties present better financial rewards. The right commercial property can turn your business into the next Google-sized success story. However, the decision about whether to buy or lease a commercial property is often far more complex than it seems.
As there is no ‘right answer’, one has to fully understand both the advantages and disadvantages of leasing versus purchasing.
Here is a list of pros and cons for both buying and leasing a commercial property to help you make an informed decision:
Purchasing Commercial Space
Advantages
- Tax Advantages and Deductions
As an owner, you can claim tax deductions for all costs associated with owning, running and maintaining a business space, including interest on the mortgage and property taxes.
- Control
Owning your business property means you have more control. It’s as simple as that. Want to change the internal layout? No worries. Got the space to extend the building? Go right ahead. Buy a property and you hold all the cards when it comes to deciding how best to manage the site. Having your own premises can give you increased security and freedom in which to run your business. Whereas lease agreements may have restraining features that give you limited control over the property.
- Additional Income
If you have additional space, you have the opportunity of renting out a portion of it to another tenant to generate some additional income. If you completely outgrow your premises, you have the option to rent out the entire space while moving into larger premises yourself or to sell.
- You can sell it
Just like residential property, your commercial premises will potentially be growing in value while you operate your business from it. Commercial property is booming in some cities, and the right property can be a lucrative investment. On the flipside, if things take an unfortunate turn, it’s an asset you can sell if you suddenly need that money.
Disadvantages
- Upfront Costs
Buying business space will initially cost far more upfront. There are property, appraisal and maintenance costs as well as a deposit and potentially property improvement costs.
- Lack of flexibility
If your business really takes off, chances are you’ll quickly outgrow a property that seemed perfectly adequate just months ago. If you’re locked into a mortgage, you may not be in a position to move anytime soon, limiting your ability to grow your operation until you can sell and find something bigger.
- Ongoing costs
Maintenance costs on a commercial property, particularly an older one, can be considerable, plus there are council rates and other annual costs to consider.
- Capital Loss
If you have to prematurely sell the property and it is sold for less than what it you purchased it for originally, this will mean a capital loss for the business.
Leasing Commercial Space
Advantages
- Best Location and Property
The option to lease provides a business with the opportunity to rent a greater choice of properties with a good location and create a better image, which you may not otherwise be able to afford to do if you buy. If like a retailer your business is dependent on location and image, the leasing option provides a more affordable solution.
- More Time
Leasing provides you with the ability to focus fully on running your business not managing your commercial investment.
- Faster response to business needs
It’s of huge benefit for businesses to be able to respond quickly to changes in their circumstance, or when fresh opportunities pop up. If on the other hand, the business is terminated, the ability to sublet may minimize the financial loss.
- Risk
Leasing is not necessarily a long-term financial commitment, which is beneficial if you are just starting out. Whilst you are entering into a lease agreement which will have a fixed time frame, once the lease expires you can leave the property.
Disadvantages
- Increase in Rent
Leasing means your rent is almost guaranteed to increase in line with CPI each year, as well as attracting further premiums when it comes time to renew the lease and the landlord ups the cost.
- Limited Control
You have little or limited control over what the owner of the property decides to do. If he/she sells you may have to relocate, which causes disruption as well as being an expensive exercise. This can result in a loss of “goodwill” that has been gained and potentially a loss customer base.
- Obligations
There can be many obligations and hidden costs in a lease which can be onerous on the tenant if they are not aware of them and can leave them out of pocket.
The decision to buy or lease a commercial property is not a simple one. The decision will depend on financial, tax, legal and business-specific situations. Before you decide which way you should go, make sure you consult with your solicitor and accountant about the legal and financial considerations of your decision.
