Commercial Real Estate, Buying vs. Leasing
A common question among business owners is often whether to lease or buy a property for their real estate needs. It’s important to do an in-depth financial analysis, which can include an NPV (Net Present Value) method or an IRR (Internal Rate of Return) method to calculate the difference in cash flow between the two options.
Some questions to consider during the decision making process may include:
- Do you expect the size of your physical business needs to change?
- Do you want to deal with maintaining a property?
- Can you afford to tie up liquid capital in commercial real estate?
- Do you want the flexibility of a lease or the stability of a mortgage?
- What are local commercial real estate trends?
You may want to consider some of the following pros and cons of each:
Owners sometimes find a property that offers more space than they can utilize at the current time in their business. The additional space can be leased to provide a secondary stream of income. However, becoming a landlord to other tenants may take away from your main business focus and become more of a hassle or a burden.
Ownership builds equity but you’ll have a loss of liquidity with money tied up in the property. There also are higher upfront costs required with property due diligence, down payment and closing costs in purchasing. While leasing costs might include attorney’s fees, security deposit and possible tenant improvements, the upfront outlay of funds would be substantially less than that of purchasing. The monthly cost of leasing may be more expensive, but gives you more financial flexibility to use cash to invest in your business.
Ownership allows you to take advantage of asset appreciation. Familiarity with the local real estate trends is important to help predict the likeliness of appreciation in value. Market trends change and there is always a chance of a capital loss though if there is a decline in property value and is a risk of ownership. This is not something that needs to be considered when leasing.
If you own it, you control it. You can make changes as needed within the property to work with your business needs. You also have financial control with fixed mortgage payments. You can control the exterior appearance of the site and you have some control over costs associated with the property. If you lease, the control of the property amenities, other tenants, management, etc. lies with the owner.
Leasing allows you to focus solely on your business and not have to worry about managing a property, maintenance costs and other issues that might arise and distract you from your business.
Leasing gives you flexibility in lease terms, often between 3-10 years. This allows you to move more easily as your business expands or changes.
There are different tax breaks for both owners and tenants. Owners can deduct interest, depreciation and non-mortgage related expenses. Tenants may be able to deduct lease payments, property insurance, taxes, utilities and maintenance. A tax professional should be consulted as tax laws are continually changing.
As with other business decisions, there are advantages and disadvantages to either Buying or Leasing. Finding a knowledgeable Commercial Real Estate Broker to help you navigate through some of these questions may help make your decision easier.