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Most business owners need to have a physical location in order to meet with customers, sell inventory and perform services. Yet purchasing real estate represents a sizable investment, and this is not always something business owners are ready to tackle. The alternative to buying a property is leasing one, and making the decision between buying and leasing isn’t always easy. Here are some basic pros and cons of each option that you should consider as you determine which choice is right for your business.
Benefits of Leasing Commercial Real Estate
When you lease, you aren’t responsible for the property’s upkeep and mortgage, yet you still enjoy several financial benefits. Some of these include:
- Greater tax deduction potential
- Less upfront cost
- Greater time freedom
- More flexibility
For many business owners, particularly those just starting out, these benefits make leasing the more appealing choice. However, these benefits must be weighed against drawbacks before making a final decision.
Benefits of Buying Commercial Real Estate
Real estate is an investment that can pay big dividends. Most commercial real estate will serve as equity for the business, giving its owners something to draw from when they need collateral or working capital. It’s also prone to appreciation, growing in value over time. When at some point the business decides to sell the property, its owners may make a profit on the building or land.
Buying commercial real estate brings tax benefits as well. Owners can deduct:
- Interest expenses
- Non-mortgage related property expenses
This means that the property grows in value while earning its owner tax benefits at the same time.
Finally, buying commercial property gives the owners control. Property owners aren’t at the whim of a landlord, always wondering when rent will go up. They are free to paint, remodel, restructure and otherwise change the property, because they own it.
Drawbacks of Leasing Commercial Real Estate
Just like purchasing, leasing has its drawbacks. First, leasing business property brings no investment potential. If real estate values increase, only the landlord benefits. Also, the average monthly cost to rent a piece of commercial real estate is typically much higher than the average monthly mortgage payment for a similar property.
As a lessee, a business owner has no control over the property. While most commercial leases allow for some changes to the building or property, such as painting or remodeling to suit the business’s needs, the amount of flexibility is entirely in the landlord’s control.
That said, because there is not 100% control of the office space, businesses may not be able to guarantee enough room for all necessary office equipment such as servers or multifunction printers. Setting up an efficient and effective office space starts with choosing the right space for the equipment needed to successfully run the business.
The rent rate can also change, and the lessee has no control over these changes during the duration of the lease.
Because both options have benefits and drawbacks, what is best for you may be different than what is best for another business owner. For this reason, consider talking with a commercial real estate agent about your options to determine what would best fit your business model and budget. Whether you lease or buy your commercial property, your commercial real estate agent can help direct you to the right property and walk you through the negotiations process.
Drawbacks of Buying Commercial Real Estate
The biggest drawback to owning commercial real estate is the cost. Business owners have to have financing to purchase the property and the collateral to make a down payment on it. This isn’t always easy to do, particularly when a business is just starting out.
Another drawback to owning commercial real estate is the lack of flexibility. With a lease agreement, the business’s owner isn’t tied down to a physical property. When the lease is up, the business can move on to a new property. Owning property means the requirement to sell or lease the property before moving.
Finally, property owners carry more liability than lessees. In addition to the risk that property values drop, the property’s owner is responsible for the health and safety of the people inside the building and must manage all repairs and maintenance.