Is Buying or Leasing Commercial Real Estate Better for My Business?

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Free Download: Commercial Real Estate Buyer's Worksheet
A free and useful tool to assist the commercial real estate buyer in determining which commercial property would be best for their business.
(Plus: our monthly eNewsletter with valuable commercial real estate news and tips!)

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Selecting a location for your business may be one of the most important decisions you face as a business owner. A big part of that decision is determining whether you will buy or lease a commercial property. Each option has its own pros and cons, and neither option will fit every single type of business. The following list contains some advantages and disadvantages of buying and leasing commercial real estate and important things to consider in determining the most ideal option for your business.
 
Advantages of Buying a Commercial Property

• In purchasing a property, you are acquiring an asset, which builds equity and appreciates in value over time.
• While tax benefits vary from investor to investor, there are possible tax deductions associated with purchasing property, including mortgage interest, depreciation of the property, and other expenses.
• Depending on its terms, a mortgage gives your business clear, fixed costs, which can facilitate making long-term financial projections and decisions.
• As the needs of your business change, buying gives you more control over the property in terms of making alterations that fit those needs without having to restore the building to its original condition at the completion of a lease.
• If the property you buy has more space than your business needs to operate, you can earn additional income by subletting the extra space.

 
Disadvantages of Buying a Commercial Property

• Larger cash outlay. In addition to a large down payment (typically 30-35% of the purchase price), there are other related fees (property, appraisal, maintenance, etc.) as well as possible improvement costs.
• While it may be highly-valued at the moment, the location you choose could decrease in value in the short term, depending on market conditions. There is a chance that the market may not be in your favour when you need to sell the property within the next 10 years.
• New or growing businesses often have unexpected demands. Buying offers less flexibility and additional costs if your business requires a change in location due to expansion or other causes.

 
It may make more sense to buy commercial property if:

• Your business is stable, generates ample cash flow, and/or has reached its growth potential.
• You have to make a lot of improvements to a property to suit your business or if your business has specific technology or security needs.
• You have experience as or interest in being a landlord or can hire someone to manage the property for you.

 
Advantages of Leasing a Commercial Property

• Leasing frees-up working capital that you can use to grow your business.
• Opportunities to lease commercial real estate are typically more abundant than opportunities to buy, so you may have more of a selection of leasing properties from which to choose.
• You don’t have to take the time to manage the property, enabling you to focus on your own business.
• When leasing, there is typically more flexibility in relocating or acquiring more space.

 
Disadvantages of Leasing a Commercial Property

• You will eventually pay off a mortgage over the long term—you will never pay off a lease. A monthly mortgage payment is often comparable to or less than a monthly lease payment.
• In making lease payments, you are not gaining any equity, which is the amount you would receive when selling and paying off the mortgage of a purchased property.
• The costs of the lease are variable as you may be subject to annual rent increases or a major increase when your lease expires.
   

It may make more sense to lease a commercial property if:

• You are running a start-up and/or don’t have a lot of capital available to buy a property in addition to growing your business.
• Your business does not have specific needs in terms of space.
• Your business is growing and you are unable to forecast your space needs in the short term.

 
Things to Consider When Deciding to Buy or Lease

• Examine your past business growth and your future business goals. Try to determine how much space you will require in the future to meet your goals. If your business is rapidly growing, the flexibility that comes with leasing a space might be a better option.
• Differentiate between what you want in a commercial space, and what your business actually needs to be successful. Make a list of requirements that are essential to your business, and stick to that list while you are searching. Resist getting distracted by features that will have little impact on your business success in the long term.
• Verify the modifications and associated costs required to make a property fit with your business’ operational needs. This will add to the overall cash outlay.
• Do you have the time and skills necessary to be a landlord or the means to hire a good property manager? If the property you purchase has other tenants, you will be required to deal with problems with the property as they arise as well as make difficult decisions ranging from building improvements to rent increases.
• Determine how quickly you need a new space. If buying a property, obtaining financing can be a lengthy process, so it’s best to speak to a lender well in advance.

 
When making this decision, it is wise to consult with a commercial lawyer to review any lease and purchase details as well as an accountant in determining your budget and identifying tax benefits. A Commercial REALTOR® can further discuss the merits of buying and leasing and help you identify potential properties based on your budget and business requirements.

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Free Download: Commercial Real Estate Buyer's Worksheet
A free and useful tool to assist the commercial real estate buyer in determining which commercial property would be best for their business.
(Plus: our monthly eNewsletter with valuable commercial real estate news and tips!)

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About CDW & Associates – RE/MAX Little Oak Realty, RE/MAX Commercial Real Estate
For over 26 years, Commercial REALTOR® Charles D. Wiebe and his team of associates have worked almost exclusively in the investment, commercial and industrial real estate market, providing the Fraser Valley of BC with industry-leading commercial real estate services. Connect with Charles and his team by clicking here.

References
www.theglobeandmail.com/report-on-business/small-business/should-i-buy-or-should-i-lease/article4317057
www.inc.com/guides/2010/07/how-to-purchase-commercial-real-estate.html
www.franchising.com/articles/for_sale_or_lease_pros_and_cons_of_buying_vs_leasing_space_for_franchise_te.htm
www.blueshorefinancial.com/Business/BusinessAdvice/YourCommercialSpace
www.bdc.ca/EN/articles-tools/business-strategy-planning/manage-business/Pages/commercial-real-estate-buy-lease.aspx?caId=tabs-5