Most growing businesses will at some point need to either lease or purchase commercial real estate. The decision to buy or lease a commercial property is a critical one and can impact the bottom line of a growing business for years. For companies that need either retail, office, or industrial commercial space; finding the right space and making the right decision to buy or lease is a choice that a business owner needs to get right.
The Pros and Cons of Leasing
Pros
More liquidity – Leasing typically ties up less capital due to the fact that a downpayment on a loan is not required to move into the space.
Fixed monthly cost – A company leasing a space generally will not have to pay for significant repairs and maintenance for the property. Paying for minor repairs and common area maintenance is typical for a commercial lease, but large unexpected expenses are mostly covered by the landlord.
Tax breaks – A business is allowed deductions for lease payments, property, insurance, property taxes, utilities and maintenance.
Flexibility – A company can simply relocate when the lease is up without having to sell the property.
Cons
No equity – When a business leases a commercial space they give up the opportunity to accumulate equity in the property.
No passive income – If a business owns a property there is always potential income by way of leasing out any unused space to another business. When you lease you give
up this income opportunity.
Rent expenses – Rent payments usually exceed the typical monthly payments you would incur to pay off a loan if you had purchased a similar property.
Less control of the space – When renting the landlord has final say on what you can and cannot do with the space.
The Pros and Cons of Buying
Pros
Equity – If you buy with cash you have instant equity. If you take out a loan you are building equity over time as you pay off the loan.
Asset value appreciation – Your equity also increases if the value of the property goes up over time.
Potential for rental income – If you have unused space you can lease it out for additional income.
Tax breaks – If you buy the property you get tax breaks for interest, depreciation and non-mortgage expenses.
Control of the property – Other than local zoning ordinances and use restrictions listed in the title, you have total control of the property and what you want to do with it.
Cons
Upfront down payment required – A purchase whether cash or financed will inherently tie up more capital than leasing a similar space.
Difficulty qualifying for financing – It can be difficult to qualify for a commercial real estate loan. Hard money lenders typically have higher interest rates.
Liability insurance required – You will need liability insurance to protect yourself from lawsuits if someone is injured on your property.
Potential for loss of liquidity or capital – If the property’s value declines over time your are stuck with the loss of capital that could have been used elsewhere.
The Final Analysis
It makes sense to buy if your company has enough cash flow for the capital expenditure. Buying is generally a good option if you are looking to build equity, plan on staying for several years, and want total control of the property.
Leasing on the other hand is an excellent option for many companies that are looking to avoid tying up cash with a downpayment and want flexibility to find a new location at the end of the lease.
Hopefully, this article has shed some light on the factors to consider when deciding if buying or leasing commercial property is right for your business. If you are looking to buy or lease a commercial property don’t hesitate to call the Meridian Real Estate Group today.
We Can Help
Whether you’re looking to lease, buy, or sell commercial property, now is still the time to do it in Atlanta. The Meridian Real Estate Group has been assisting commercial clients for well over a decade and would love the privilege of earning your business. Our goal is not just to help our clients with a transaction, but to support the building of financial legacies through real estate. Call us today at 678-631-1723 or visit us online at www.themeridianway.com. We look forward to serving you.
By John Rose, Realtor
The Meridian Real Estate Group