Lease or Buy? Decoding Commercial Real Estate Decisions: Key factors to consider for your real estate decision

Many businesses operate out of commercial spaces, whether they be storefronts, factories, or offices. If you’re launching a new business or expanding an existing one, you’ll have to decide whether to rent or buy commercial real estate.

When you buy a property, you can either pay cash upfront or finance it with a loan. With a lease, you rent the property for a set term, at which point you must renegotiate if you wish to continue using it. Several factors go into choosing the right strategy for your business, including cash outflows, recurring costs, tax implications, property value, business equity, and more. Serrone Hunter is here and can walk you through every step of the process.

Pros and Cons of Buying Commercial Real Estate

Pros of Buying Commercial Property

Building Equity:
If you pay all cash, you own 100% of the property right away. If you take out a loan, your down payment and monthly payments build equity in the property.
Appreciating Asset:
Owning commercial real estate allows you to benefit from capital appreciation — the increase in your property’s value over time.
Rental Income:
If you have leftover space, you might want to rent it out to tenants and create a secondary income stream.
Tax Breaks:
You can deduct interest and depreciation on your commercial property.
Control:
When you own property, you have control over it, which means you don’t have to negotiate with a landlord if you want to reconfigure the space.

Cons of Buying Commercial Property

Upfront Spending:
You’d have to make a down payment of 10% to 40% of the property’s value, along with closing costs and other fees.
Difficulty Qualifying for Financing:
You may have trouble qualifying for a commercial real estate loan with a reasonable interest rate.
Prepayment Penalties:
Many commercial real estate loans come with hefty prepayment fees.
Liabilities:
You are responsible if someone is hurt on your property, which means you’ll have to pay for liability insurance.
Loss of Liquidity or Capital:
There is always the chance that your property’s value will decline, and your money would be tied up in the property.

Pros and Cons of Leasing Commercial Real Estate

Pros of Leasing Commercial Property

More Liquidity:
You tie up significantly less of your cash because you don’t need to make a down payment to move into the space.
Fixed Monthly Cost:
You generally won’t have to pay for significant maintenance, repairs, or upkeep to the property.
Tax Breaks:
You may deduct costs such as lease payments, property insurance, property taxes, utilities, and maintenance.
More Flexibility:
Qualifying for a lease is often easier than qualifying for a commercial real estate loan, and you can move when the lease is up.

Cons of Leasing Commercial Property

No Equity or Appreciation:
You don’t accumulate any equity when you lease.
No Passive Income:
You aren’t the landlord and thus cannot collect rent from others.
Rent is Expensive:
Your monthly rent payments may exceed mortgage payments on the same property.
No Control:
The lease may have restrictions and even early termination clauses that limit your control over the rental space.

When Should You Buy or Lease Commercial Property?

Typically, it makes more sense to buy if you have enough cash for the down payment and six months’ worth of mortgage payments without causing your business to hit a cash crunch.

Purchasing might be a good option if you:

Want to rent out part of the space to generate a secondary income stream.
Plan to build equity in the property.
Want to reorganize the space as you see fit.

On the other hand, leasing might be the right answer if you want:

The flexibility to move out at the end of the lease.
To avoid tying up your money in the down payment.
More tax deductions on the leasing costs.
Freedom from the responsibility of maintaining the property, depending on your lease.
To operate in a space too expensive to purchase.

Making the right decision between leasing and buying commercial real estate depends on your business's unique needs and financial situation. Call Serrone Hunter today, your experienced real estate advisory group. We can help you choose the best path for your commercial space needs.