Buying Vs Leasing Commercial Property
The Pros and Cons of Buying or Leasing Commercial Property
When opening a new business, relocating, or expanding, business owners face a choice of either buying a commercial space upfront or getting a lease. Acquiring an investment property is a choice between buying or leasing commercial property. Both choices have their own unique advantages and disadvantages. Your answer will depend on your specific needs, long term goals as a business, and your spending power.
We’ve come up with a list of the pros and cons in buying or leasing any type of commercial property. Read through and see how you can make smarter investment decisions in buying or leasing commercial real estate.
BUYING COMMERCIAL PROPERTIES
There are many advantages to buying commercial property. More than anything, having something you can call your own gives you a sense of security. You will not be burdened with having to find a business location every few years or so. And you will also not have to deal with impossible landlords. Other than that, these are other advantages of buying a property.
✓ Build Equity – When you acquire a commercial property by a mortgage, you build equity. Your payments will eventually build equity to pay your principal loan. It acts as an investment. If you decide at a later date to sell or refinance the property, you can deduct the current market value against your principal loan amount.
✓ Capital Growth – When you buy a property, you get to enjoy capital growth. This means that your property increase in value over time. Capital growth in Cambodia is hard to pinpoint accurately because it largely depends on location and property type. However, it can go from as low as 1% to as high as 20% annually.
✓ Income Potential – Businesses who decide to buy a commercial property does not usually use all of the space. Most of the time, you buy a property that has more space than your current needs because you give enough room for future expansion. You have the option of renting out space that you are not currently using to augment your loan payments. Typically, ideal spaces that can be rented out to third parties are small office spaces on upper floors or retail spaces on the street level.
✓ Tax Payments – There are also tax considerations when buying a property. Owners don’t get charged for depreciation and non-mortgage related taxes. Taxes for buying a property is lower than leasing a property. And tax holidays are available for start-up companies to help them recover from their initial investment.
✓ Flexibility and Growth Opportunities – The most important advantage of buying a property is the flexibility of use. Because it’s yours, you can do as much renovation, redecoration, or reassignment that you want in the property. You don’t have to deal with unreasonable landlords and just use the space whichever way you want it to be used.
Your property will not be at the mercy of the rental market surges, or rental rate increases. Typically, lease rentals increase by 10% to 30% yearly. If you buy your own commercial space, you can expect to pay the same mortgage payment monthly, or for fixed yearly interest.
Although there are advantages, there are also risks to buying your own commercial space. You will be at the mercy of the property market, you need to have an available budget to spend, and unless you buy more area than your current needs, you will lack space for future expansions.
✘ Capital – The most significant disadvantage of buying a commercial space is that you need a large capital. Your budget will be tied up in assets that you cannot use to buy that new machine you want or funds in R&D for the new product you are developing. You will need to pay upfront or apply for a loan that you will need to pay at least 6x more compared to getting a lease.
✘ Additional Responsibilities– Using commercial property you bought as an income opportunity in the form of rent means additional responsibility. You will act as a landlord and will have to take care of maintenance, repairs, and leasing contracts. It may not be a big deal but can prove to be difficult and time-consuming.
✘ Depreciation – Most of the time, property appreciates in value over time. However, there is still depreciation to consider. You will be at the mercy of the trend in the property market. Your property may lose value in case of recession or loss in demand, and the building itself experiences normal wear and tear from long term use.
✘ Space Constraints – Permanence is both good and bad. When you buy, you can stay in your property for as long as you like. Similarly, buying property means that your space is permanent and there is no room for further expansion unless you already factored in additional space for expansion when you decide on a specific property to buy.
✘ Maintenance – Maintenance, repair, and reorganization will all be your responsibility as the property owner. You need to ensure that the property is following all building regulations for fire and safety. You are also required to put some budget for cleaning costs, pest control, and other maintenance costs.
LEASING COMMERCIAL PROPERTIES
Leasing, just like buying, has its own advantages. The most striking advantage is that you don’t need a lot of money tied up in the capital. You also don’t need to worry about maintenance costs and upkeep. You’ll be able to just focus on your business and let the landowner worry about his property.
✓ Less Capital – Deciding between buying or leasing commercial property can be really tricky. If you choose to lease a property, you don’t have to fork too much capital before your business operation starts. A lease guarantees you can stay in a particular area over a fixed period, and you have the flexibility of moving out when the area or commercial space proves to be not ideal to fit your needs.
✓ Tax Exemptions – In a lease agreement, you can deduct property taxes, lease payments, insurance, and even maintenance and repairs from your overall tax responsibilities. You also don’t need to worry about taxes for your property because the owner can take care of that for you.
✓ Expansion Flexibility – In a few years, there is a probability that your business will expand and need additional space. A lease will allow you the flexibility of transferring to a bigger space, a better location, or a cheaper rental option. Compared to buying a commercial space, renting or signing a lease agreement is not a permanent arrangement. You have the option of jumping ship if and when you want to.
✓ Shared Expenses – For businesses renting multi-tenanted office space, expenses for common areas are shared. The expenses can range from maintenance costs, utilities, and security. Unless specifically stipulated in the lease agreement, the general upkeep and maintenance will be the responsibility of the property owner.
✓ Fixed Monthly Costs – When you lease instead of buy commercial space, you can generally expect to pay the same amount each month according to what your lease contract dictates and you have a budget allotted for your overhead. You don’t need to worry about unforeseen expenses like termite and pest control, a leaking roof, plumbing services for clogged bathroom pipes, and others.
Leasing your commercial space has its disadvantages too. The most significant disadvantage is that there is no return on investment. You will be throwing away good money that will not come back to you in any form.
✘ No Income Opportunity – Depending on your lease negotiations and what’s stated in the lease agreement, you are not allowed to sublet or re-use the space to get income from rental. Your monthly expenses will always include the amount you pay for the leased property.
✘ Property Control – In a lease agreement, you have very minimal control over the commercial space you are occupying. Most of the time, property managers are hired to manage everything in the unit, from its design, furnishings, to monthly rentals. You can add your own furnishings and appliances, but you cannot make any major changes without the owner’s approval.
✘ Higher Overhead and Monthly Fees – You can end up paying a higher amount in rental fees over time than you will with monthly loan payments. Additionally, contract renewals will mean rental increases and it’s not going to stop while you are occupying the property.
✘ No Equity or Appreciation– Rental fees are like putting money on pockets full of holes. No matter how long you stay in the commercial space, it’s not going to be yours. The payments will not be equity and the appreciation in the value of the property will benefit the owner instead of you. You can sublet to augment the cost of the rental, but that will still be subject to owner’s approval.
Consult the Commercial Real Estate Experts
Whether leasing or buying commercial real estate, understand the risk and consider all the factors before making an investment decision. Due diligence is required when deciding whether you are going to acquire a property or lease it for a certain period. A reputable commercial real estate agency like IPS Commercial will help you make smarter investment decisions. They will make sure that you are only presented with properties that meet your business requirements including size, staff, future plans, and specific budget. They will guide you all through out the process and provide you with options that are most beneficial for you and your business.