Buy and Borrow

Commercial Real Estate: Buying vs. Leasing

Erin Palmer

May 10, 2018

Commercial lending

Location is a critical part of success for many small businesses. So for small business owners, it’s important to decide whether they should buy or lease commercial real estate.

To make the decision easier, consider the needs and goals of your business. Each option has pros and cons, so let’s begin with a few helpful questions to help guide you:

  • Would you rather have fixed costs or variable costs? Buying commercial real estate locks in your costs up front while renting costs could shift every time you sign a new lease.
  • How long do you plan on staying? If you plan on being at the location for more than 7 years, for example, buying may save you money. If you want the flexibility of a short-term location, leasing may make sense.
  • How much control would you like over your property? Renters are subject to the terms in the lease, so businesses may have to make adjustments to fit into the lease agreement. Property owners can have more control over the property.

After answering those questions, you’re ready to examine the benefits of each option.

Benefits of Buying Commercial Real Estate

Small business owners can invest in commercial property for long-term value and stability. The benefits of buying commercial real estate include:

  • Build equity
  • Stable rent costs each month
  • Property value may increase over time
  • Property could lead to additional income if you sublet unneeded space
  • Potential tax deductions, like interest expenses
  • Freedom over property decisions without landlord

Small business owners who buy instead of lease get added value from the property. Instead of just housing your business, your property can build equity over time. You may also be able to rent out part of the commercial space to bring in some extra money.

Owning commercial real estate can have other benefits as well. For example, if you own property that increases in value over time, you could sell it when you’re ready to retire and put the funds toward your retirement.

Buying property does come with some upfront costs, like a down payment and necessary appraisals. You will likely pay more in upfront costs when you buy compared to when you rent. However, buying property is an investment that may make you money in the long run. Any money spent toward rent doesn’t have the same value.

Benefits of Leasing Commercial Real Estate

Leasing property is another option for small business owners. Benefits of leasing commercial property include:

  • Flexibility to move locations
  • Possible tax deductions, like property taxes
  • Potentially lower upfront costs and liquidity than buying property

If your business requires flexibility to address considerations such as expansion or the ability to move locations, leasing could be a good fit. However, businesses that want to stay in one location would lose out on building equity if they lease instead of buy.

Leasing a property does come with upfront costs, like security deposits. These upfront costs will likely be lower than they would with buying property. This may allow your business more liquidity for things such equipment and vehicles. But keep in mind that though the costs might be lower in the beginning, leasing doesn’t have the same equity building and income earning potential as buying.

Remember that leasing costs are subject to change each year or whenever a lease is up. So even if a property is affordable now, if rent costs increase over time, it’s possible to get priced out of your property. So if your business success is dependent on a stable location, make sure that you can still afford the property if rent increases later.

Resources May Help with Buying Commercial Real Estate

While weighing the benefits of each option, money and capital will probably play a big part in the decision making process. Some businesses may have access to resources that could help with real estate and land purchases. For example, the U.S. Small Business Administration (SBA) offers loans for small businesses that qualify.

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