When it comes to commercial real estate (CRE), business owners must decide between owning property or leasing space. Each option comes with distinct advantages and disadvantages, influenced by financial, operational and strategic considerations.
Buying CRE
Here are some of the pros of ownership:
- Equity, appreciation and tax benefits
One of the most significant advantages of owning commercial real estate is the potential to build equity over time. Each mortgage payment brings an owner closer to full property ownership, creating a valuable asset.
In addition, commercial properties often appreciate in value, providing an opportunity for long-term financial gains. Owners benefit from market appreciation, making real estate a profitable investment over time.
Owners can also take advantage of tax deductions, such as mortgage interest, property taxes and depreciation. These can significantly reduce taxable income and offer long-term financial benefits.
- Property control
Owners have full control over the property. That includes modifications and customizations to suit specific business needs. This freedom can improve operational efficiency and branding without requiring landlord approval. Knocking out a wall or adding on isn’t much of a problem when you own the place.
Owners are also free to rent out unused space to other tenants, creating an additional income source to offset the cost of ownership.
On the other side of the ledger, here are some cons to owning a commercial property:
- Initial investment and other costs
Purchasing CRE requires a substantial upfront investment, including a down payment, closing costs and other fees. This can put a considerable strain on smaller businesses and hinder growth by tying up capital.
Property owners are also fully responsible for all maintenance, repairs and renovations. These ongoing costs can be unpredictable and expensive, particularly for older buildings.
Leasing CRE
For many businesses, leasing is clearly the way to go. Here are some pros to leasing:
- Lower initial costs
Leasing requires less upfront capital compared to buying. With no down payment or property purchase expenses, businesses can use their capital for other operational needs.
Most repairs and upkeep are typically the responsibility of the property owner or landlord. This can free up time and resources for tenants, allowing them to focus on core business operations.
Furthermore, these costs are comparatively predictable in a leasing situation. Lease agreements outline rent payments, allowing businesses to plan their financials accordingly. Some leases include utilities and maintenance, simplifying cost management.
- Flexibility and access to good locations
Leasing provides the flexibility to relocate or expand as business needs change. Shorter lease terms or options to sublet can allow businesses to adapt without being tied to a long-term financial commitment. Leasing also allows businesses to operate in prime locations where purchasing property may be too expensive. This can enhance visibility, customer access and business growth potential without the financial burden of ownership.
Despite the many benefits to leasing, there remain several cons:
- No equity building, rent increases
Unlike ownership, leasing does not allow a business to build equity in the property. All rental payments go directly to the landlord, with no long-term financial gains from appreciation. These rents are operating expenses, not investments that can pay off down the road.
Also, lease agreements may include periodic rent increases, tied to inflation or market conditions. Over time, leasing costs can become unpredictable, especially in high-demand areas.
- Lack of control
Tenants are limited in how they can modify or customize the space, often requiring landlord approval for any significant changes. This can restrict how the space is tailored to meet specific business needs.
Some lease agreements come with restrictions, such as limitations on the type of business activities, hours of operation or alterations to the premises. These restrictions may hinder a business’s growth or operational efficiency.
Conclusion
The decision between owning and leasing commercial real estate ultimately depends on a business’s financial capacity, growth plans and priorities. Each option carries its own set of risks and rewards, making it essential to evaluate which aligns best with a business’s strategic objectives. To get more insights, talk to the expert advisors at SVN Commercial Advisory Group. We can provide guidance, helping you make that important decision.