We’ll be direct. When you have a startup or a small business, leasing offers more flexibility in money, loaning, and changing locations. If you plan to buy a commercial space, only do so if you’re prepared to rent the same space.
No one wants “buyer’s regret.” And no business owner wants “business decision regret.” So we elaborate on the pros and cons of buying versus leasing a commercial space below. So if you’re a business owner just starting out or considering going long-term, here are the facts to help you decide.
Comparison of Benefits and Drawbacks of Buying vs Leasing a Commercial Space
When you buy or lease a commercial space, you must decide which benefits you want and which drawbacks you can live with. Therefore, we don’t just compare the pros and cons. Instead, we compare the benefits of buying against the benefits of leasing. We also compare the drawbacks of buying against the drawbacks of leasing.
Renting frees up your commitment and money but gives you less control. Buying gives you more control and asset potential but can also have higher risks.
Below, we compare the benefits of leasing or buying a commercial property.
| Benefits of Leasing a Commercial Space | Benefits of Buying a Commercial Space | |
|---|---|---|
| Cashflows | Cashflows Business income | Business income, long-term property investment, rent income |
| Ease of Borrowing | Money not used for a down payment can be borrowed against it | Property equity can be borrowed against it |
| Tax Deductibles | Lesser deductibles in the form of property insurance, property taxes based on lease type, lease payments, utilities, and maintenance | Higher deductibles in the form of mortgage interest, property taxes, property management expenses, and depreciation |
| Fixed Costs | Monthly lease payments until lease renewals | Fixed-rate mortgage with property and liability insurances to offset unexpected damage and legal costs |
| Flexibility | Relocation | Control and customization of property |
As you can see abvoe in the table, the benefits of buying a commercial space is higher. But the higher the benefits, the greater the risks. Below, we also compare the drawbacks of leasing and buying a commercial space.
| Drawbacks of Leasing a Commercial Space | Drawbacks of Buying a Commercial Space | |
|---|---|---|
| Costs | Increasing rent, limited tax benefits | High upfront costs, maintenance and liability costs |
| Investment Risk | No equity | A large portion of your money is tied down to a property, property value can fluctuate |
| Property Limitations | Limited control in customizing and modifying | Limited flexibility in moving |
Read the pros and cons of leasing or buying commercial property below for a more elaborate discussion.
Benefits of Leasing Commercial Space
Renting is more viable for small businesses and startups. Leases allow you to move and spend more money on other costs. Below are some of the benefits of leasing a commercial space.
- Lower Upfront Costs
When you only have to pay rent, you don’t need a down payment. This also frees you money for qualifying for other loans. But you’ll need to pay the attorney, broker, release inspection, and security deposit fees.
- Predictable Monthly Costs
You wouldn’t need to spend for unexpected damages on the property when leasing. This advantage makes it easier to budget and plan for the future. Check your contract for the extent of your responsibility in fixing what would be defined as minor repairs.
- Tax Breaks
Tax breaks are one of the advantages of renting over buying. You can deduct the following costs when you lease commercial spaces: property insurance, property taxes based on lease type, lease payments, utilities, and maintenance.
- Flexible with Less Commitment
When you lease, you are flexible in two ways: relocating and qualifying for a loan. Renting over buying offers fewer risks to banks. Therefore, it’s easier to qualify for commercial rental spaces. If you are starting and are unsure how the business will go, renting allows you to be free of the commercial space without having to sell. Or you can move to another business hot spot in your city.
Benefits of Buying Commercial Space
When buying commercial real estate, you also get the advantage of having a property. You are more likely to qualify for loans because your commercial property makes you more stable and secure. You also have more assets aside from your business. Below are the benefits of buying commercial spaces.
- Equity
Upon purchasing a property, you build up equity. You can build up equity over time depending on inflation and economic growth in your location and industry. You can use this equity to get a loan to have more money for your business. When you borrow against your property’s equity, you get lower interest rates because you have collateral that lessens risk.
- Long-term Investment
As equity increases over time, so does capital appreciation. Capital appreciation is affected by the same things as equity: inflation and local and industrial economies. With your long-term investment, you can fund your retirement once you sell your property or business.
- Greater Control and Customization
When buying commercial space, you have more say in it. You can modify and improve as you see fit without needing a landlord’s approval. You can build your business’s brand and identity by customizing your space.
- Fixed Costs
Commercial leases have predictable lease payments but can change with lease renewals. When you purchase a commercial space, you can fix your mortgage rate.
- Tax Benefits
Property owners have several advantages over tax benefits. You can deduct taxes from mortgage interest, property taxes, and depreciation.
- Rent Income
When owning a commercial space, it is best to take advantage of renting it. Most businesses only use 50% of their commercial space. You can earn extra income from your business by renting the rest of the space.
Drawbacks of Leasing Commercial Space
Just as there are benefits to renting a commercial space, there are also downsides. While rental costs are fixed, they can be bigger than fixed mortgage rates. You may have to make payments throughout the lease without benefiting from equity or appreciation of the property. Below are some of the disadvantages of leasing commercial spaces.
- No Equity
Unlike owning a property, rental properties don’t build equity. Therefore, businesses do not have the potential to earn a return on their investment. Fortunately, there are lease-to-own commercial properties where your rent is part of your purchase.
- Rent Increases
The triple-net lease agreement makes tenants pay for insurance, maintenance, taxes, and rent. Landlords may increase rent at the end of a lease term, which can affect a business's bottom line. While you can move, you must consider the moving cost versus the monthly lease.
- Limited Control
Leasing a space means that a business is subject to its terms and conditions, including restrictions on modifications and use of the property. You will need a landlord’s approval before modifying your leasing property.
- Limited Tax Benefits
Unlike property owners, businesses that lease commercial space are generally not eligible for tax deductions related to property ownership. Just as you can earn more money when you have more money, you also have greater tax benefits when you purchase commercial space.
Drawbacks of Buying Commercial Space
Buying commercial property has its downsides too. Just as you can have bigger gains by purchasing a property, you also have bigger risks and payments. See below the disadvantages of buying a commercial space.
- High Upfront Costs
Purchasing commercial space requires significant upfront capital. Down payment for commercial spaces in Washington can be 20-25% of the purchase. If a commercial space is $1M, the down payment can be $200,000 to $250,000. This drawback can be a barrier to entry for many small businesses.
- Investment Risk
When your money is tied down on a property, you may not be able to use it anywhere else. This can be a short-term risk for your business compared to leasing and using more money for your business. Consider your property equity for loaning and your business cash flow before buying.
- Uncertainty of Property Value
Buying commercial real estate can also give you a degree of insecurity. Property values can fluctuate over time. Businesses may be unable to recoup their investment if they need to sell the property. There is also a location risk. If the property is located in an area that experiences a decline in property values or economic downturn, the business may be negatively affected.
- Limited Flexibility
Owning a property means a business is tied to a specific location. They may also be limited to adjusting their space as their needs change.
- Maintenance and Liability Costs
Property owners are responsible for maintenance and repairs, which can be costly and time-consuming. You must also consider communal spaces and external fixtures in your property. Property owners are also responsible for any accidents or injuries. Remember to buy liability insurance for costly legal fees and settlements.
Buy or Lease Commercial Space: Factors to Consider
It will take time and thoughtful consideration whether to buy or lease a commercial property. Below are factors to consider, which we hope to give you insights into your important decision.
Business Needs and Goals
As mentioned, buy a property only if you’re prepared to rent part of its retail space. Do you plan to have rental income? Or focus on your business only?
- Lease: Focus on business only without having to do property management in the leasing space.
- Buy: Focus on business as well as have rental income.
Furthermore, are you planning to integrate your business brand into your location? If that is the case, you may also need to customize and modify the commercial space as you see fit.
- Lease: My business does not need integration into the location. I may relocate someday.
- Buy: My business works well with certain aesthetics or equipment.
Budget and Financing Options
Can you afford to spend more money upfront? Or can you afford to spend more money in the future as the business grows?
- Lease: I don’t want to pay that much for a down payment when I may need it for my business.
- Buy: I can pay a down payment now and fix my mortgage rates because I am certain about the analysis of my business growth.
Remember, if you lease, you may be paying less than a down payment, but you will be paying more than mortgage rates down the lane.
Furthermore, you must consider qualifying for certain loans. If you lease, you have more money to use for your business. But do you need that money to borrow more money? Or do you need
- Lease: I can use the money as company funds or borrow against it.
- Buy: I can borrow against my property upon building equity and have a more secure debt.
Location and Accessibility
Are you certain about the location’s market growth? The location of your business in your city or county’s business hot spots can increase and decrease your property value and your business growth.
- Lease: I am not certain about the market growth of my location, and I want to test it out first.
- Buy: My location is accessible to many buyers, and I need to seize it for future investments.
Market Conditions and Trends
How aware are you of the market conditions and trends of your business? If you plan to set up a bakery, do you keep up with the in-demand pastries in your city and social media?
- Lease: I have a startup business with the potential to trend. However, I may need all the marketing I can get.
- Buy: My products or services are in-demand throughout the year, and I keep up with the industry’s trends.
Future Growth and Expansion Plans
Are you in for the long haul for the business? Or do you want to test the waters first? Buying a commercial space is for you if you’re set for a long-term commitment.
- Lease: I see my business growing elsewhere.
- Buy: I see my business growing right in that location.
Buying or leasing will also involve tax payments and compliance with the local government. You may need accounting software, a consultant, or an accountant to help with business management.
- Lease: Fewer tax deductibles with fewer costs
- Buy: Higher tax deductibles with high costs and risks
You will also need to consider how extensive you want your responsibilities to be. Leasing gives you fewer responsibilities outside your business as a tenant. Buying makes you the owner with maintenance and liabilities you must discuss with your legal team.
To Buy or Lease Commercial Space: Your Final Decision
Buying or leasing commercial property offers pros and cons. We often recommend renting for small businesses and startups. We recommend buying a commercial space if you are prepared to rent the same space.
However, it is best to look at your business situation. By knowing your business needs and goals, you’ll understand better which benefits are for you. By knowing what you don’t need and what you can risk, you can decide which drawbacks you can live with.
Once you’ve made up your mind, check our for-sale and for-rent commercial real estate.
