Buying vs Leasing Commercial Real Estate: Part 2 – Buying

12 mins read

This article is written to explore the pros and cons of buying commercial real estate.

In the 1st part of this series, we discussed the pros and cons of leasing commercial real estate, and now it’s time to talk about your other main option: buying! As nice as it would be to be able to definitively state that one choice is better than the other, more cost-effective, or simpler, the truth of the matter is that making the decision between buying or leasing your new space is dependent on a wide variety of factors! For some businesses, one might be the obvious choice, and for others it might be a toss up between these two options to determine what is the most effective next move. Whether your business is brand new and you’re looking for your first physical office space or storefront, or you’ve outgrown your current location, buying a new property is a big deal!

There are many factors that will go into the decision-making process of buying or leasing, and as there is no cut-and-dry, right-or-wrong answer, these pros and cons lists that we have created will hopefully help guide you as you make this important decision.

Buying Commercial Property

Pros of Buying Commercial Real Estate:

1. Building Equity

The first and most obvious benefit of buying commercial real estate from which to run your business is that once you make the purchase, the space is yours. If you pay the entirety of your costs upfront, you immediately own 100% of the property. If you get a loan to help you pay for the property, your down payment and monthly mortgage payments will help build equity in your new property, and if you decide to sell or refinance that property, your equity will be the difference between the property’s fair market value and your remaining loan balance.

2. Appreciating Asset

As was mentioned in the previous part of this series, real estate property value always appreciates over time, so by purchasing real estate you are making a valuable long-term investment! While the amount of appreciation can vary with inflation rates, local supply and demand, interest rates, etc., the bottom line is that you will always have this asset to fall back on if you should need. If the business goes under, you close, or you want to sell because you want to move your business in another direction, you will have the real estate sale as a source of capital or you can always lease the property out to other businesses to gain secondary income.

3. Rental Income

The pro of having an appreciating asset leads right into our next pro: rental income. Of course, if your business model changes and the space you have purchased is no longer fulfilling the needs of your business, you can lease the space out to other businesses and earn secondary income that way. However, your business does not need to go through such radical changes to take advantage of rental income! If there is any space in your new property that you are not using, and this can happen often, you can then rent that space out to tenants to create a smaller, secondary income stream.

4. Tax Breaks

When you own real estate, you are eligible for tax deductions which allow businesses to claim the loss in value of capital assets from wear and tear over a period of years. While real estate property always appreciates over time, the depreciation of the building you are using can be a great place for deductions and tax breaks. For more information, check out our article on Tax Saving Opportunities, and be sure to consult with an experienced CPA.

5. Control

While leasing a property means that you are, essentially, at the mercy of your landlord, owning your property means that you have full control over it. As owner, you choose how, where, and when to do maintenance, upgrades, renovations, etc. without having to answer to anyone else. Not to mention, your monthly mortgage payment will be fixed, and you will not have to worry about any landlords hiking your rent up at the end of your loan period. Similarly, though you will be solely responsible for all maintenance costs large and small, your mortgage payments will be lower than a standard month’s lease.

Cons of Buying Commercial Real Estate:

1. Upfront Spending

When purchasing real estate, you will be required to make a down payment of somewhere between 10% and 40% of the total sale price. For smaller businesses, or businesses without large amounts of accessible capital, this can be a hefty amount that is difficult to come up with, let alone part with. Additionally, you will need to cover a variety of initial fees such as closing costs, origination and appraisal fees, etc. In order to pay for this, many businesses will need to take out mortgages wherein they will be paying both the principal costs as well as interest.

2. Financing

When looking to get a commercial real estate loan, it can be difficult to qualify if you or your business are unable to get approved for bank financing. While many small businesses can get loans from the Canada Small Business Financing Program, if your business does not qualify you may be looking at interest rates up to 10% or more. Additionally, if you are able to get a commercial real estate loan, many come with big prepayment fees or other penalties specific to commercial real estate if you prepay the balance.

3. Liabilities

When you purchase commercial real estate, you are then liable if someone is hurt on your property. Due to this, you will need to get liability insurance, and if you choose to lease any of your space out, you will require additional insurance and upkeep. Additionally, many loans may require a personal guarantee, which means that you will be personally liable to cover the loan’s payment if your business is unable to.

4. Loss of Liquidity or Capital

While investing in real estate can be a great move for some, it can make things a bit tight for others. When you purchase real estate, your money will then be tied up in that property and is not as accessible to you and your business. If you need that money for any other investments, purchases, changes in your business, you will need to finance them elsewhere as a large amount of capital is engaged in the owning of your property. Further, while real estate always appreciates in value over time, it is not a consistent rise and is susceptible to dips and falls in value as well. If you happen to want to sell your property during one of these dips after a short enough time where the value has not appreciated, you may take capital loss while selling.

As you can see, there are a variety of pros and cons to buying commercial property. When deciding if buying is right for you, it’s important to consider a few things. Purchasing commercial real estate is a long-term investment for long-term wealth, meaning that if you believe your business is growing at a steady and predictable rate, or remaining at a profitable level that will sustain your purchase, it will ultimately benefit you to have invested in property. Owning your property allows you stability as you do not need to worry about rent hikes, have full control over your property without needing to answer to a landlord, and have the opportunities to earn secondary income by leasing out unused space to other tenants.

Deciding where to “set up shop,” as it were, is a huge decision to make! With options of both buying or leasing, it’s important to take the time and consider what might be best for your business. As you evaluate all of your options, keep in mind these 3 factors:

    1. Your Business’s Goals
    2. Your Business’s Access to Capital
    3. Your Business’s Projected Growth

Keeping these in mind, we hope that this compilation of the potential pros and cons of buying commercial property has been beneficial to your decision process. Again, there is no definitive or general right or wrong answer to buying or leasing, as it all depends on how your business is doing, what your business needs, and where you want your business to go from here.

Now that we have gone over the pros and cons of both leasing and buying, it’s time to make some decisions! While this series has not given you a definitive buy or lease answer, we hope that it has given you food for thought as you step forward in moving your business location. As always, when making large financial decisions, it is in your best interest to consult with an experienced, trusted CPA who will be able to help determine what is best for you, your business, and your business’s future.

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