Leasing Vs. Buying Commercial Real Estate

Now that you’re in the position to acquire commercial real estate, it’s time to decide the best choice for your Memphis business: buying or leasing? Because each option comes with its own list of pros and cons, it’s important to understand what it means to buy or lease your office space before going down either path with the experienced Jones Aur team! The short version is self-explanatory: when you buy commercial property, you purchase it from a seller with cash or loan proceeds, while leasing means you are renting the commercial property from its owner. The reality is a lot more complex, of course, so let’s explore it in a little more depth below. 

Pros of purchasing: earning equity in the property

A commercial property that’s been purchased can earn equity for you in a couple of different ways. If it was financed with a loan, the property will earn equity as you repay it. If you happen to renovate or expand the property, its value will increase, and so will the equity. When you lease a commercial property, the benefits of equity will go directly to the landlord instead of you. 

Pros of purchasing: asset appreciation

While property improvements will increase its value, so will the general appreciation of the commercial real estate market. Commercial property in many markets tends to appreciate or grow in value over time. This gives you an advantage should you choose to sell later—you’ll likely have a sizable profit to work with as you move forward! 

Pros of purchasing: tax benefits

Many expenses can be deducted from your taxes when you’re a commercial property owner, including interest and depreciation expenses. You’ll also be able to deduct some expenses unrelated to your mortgage, and these savings can help offset the costs of property ownership. Still, it’s always best to consult a tax professional for information on the best use of deductions when purchasing commercial real estate for your business.

Pros of purchasing: rental potential

On average, businesses purchasing commercial real estate occupy around 51% of the property. If your business isn’t taking up the entire space you’ve purchased, you have the option to rent it out. This can bring in additional income, but it does mean you’ll be a landlord for any tenants. That comes with its own set of responsibilities that you may or may not be willing to take on! 

Cons of purchasing: more upfront costs

Purchasing commercial real estate instead of leasing means you can expect to pay quite a bit more upfront. Most lenders require at least 10% down, while some can go as high as 40%. With down payments, closing costs, and due diligence fees, you could pay up to six times more upfront as a purchaser rather than a renter. This will require your business to have a fair amount of liquid capital on hand to complete the purchase. 

Cons of purchasing: increased liability

When you own a property, you become responsible for the health and safety of anyone who enters it. You’ll also need to consider the costs of covering any necessary maintenance and repairs. If you rent out other parts of the building, as mentioned above, you’ll also be liable for them, which will generally require additional insurance policies.

Cons of purchasing: depreciation risk

While it’s true that the increase in commercial real estate values will provide you with additional equity and value as a property owner, values are never guaranteed to continue increasing. Some experts are predicting an upcoming correction in the real estate market, which could cause your property to depreciate based on those conditions alone. 

Cons of purchasing: no relocation flexibility 

When you lease a commercial property, you have some flexibility in renewing at the end of the rental term or letting it lapse and moving into a new place that better fits your needs at that time. When you own the property, that flexibility doesn’t really exist. Whether your business is expanding or downsizing, selling your current property and finding a new one can be challenging. Lease terms allow you to reassess your business needs every few years, whereas mortgage terms will lock you in for a bit longer.

Pros of leasing: more liquidity

You won’t need nearly as much money upfront for a lease on commercial property as you would if you were buying. Even with a security deposit, pre-lease inspection, and attorney fees, your costs will be significantly less than the down payment required for purchase. This will leave you with more liquid capital readily available since it won’t be tied up in the acquisition process. 

Pros of leasing: possible tax benefits

This is an advantage that purchasers and renters share! The tax benefits involved are different, though. When you lease a property, you should be able to deduct the lease payments, property taxes and insurance, utilities, and maintenance costs. As noted above, you should consult a tax professional for more information on the deductions associated with a commercial real estate lease.

Pros of leasing: more flexibility in relocating 

Most lease terms last anywhere from 3-10 years, while mortgages average 15-30 years. This can be beneficial as it lets you reassess your business needs more frequently and move from one place to another if it becomes necessary due to expansion or downsizing. Leases can also be useful if you wish to occupy a space but aren’t in a position to purchase it immediately. With time, you may be able to make the leap from leasing to buying! 

Pros of leasing: location, location, location

Leases can come in handy if you like a property that’s part of an existing development but doesn’t have any purchasing options. Signing a lease will get you into the ideal location for your business even if you aren’t able to buy the building.  

Cons of leasing: no investment potential

There are some hidden costs that come with leasing a commercial real estate property. Since you don’t own the building, you won’t benefit from the price appreciating if it sells. You can’t build equity in it, either, or rent any part of it to someone else. This can limit any additional income potential. 

Cons of leasing: higher monthly payments 

A commercial real estate mortgage will typically be spread out over many years. Because commercial lease agreements tend to have much shorter terms, the monthly lease payment will often be significantly higher than a mortgage payment. Some lease agreements also require tenants to pay monthly property taxes, retail insurance, utilities, and any relevant maintenance costs. This can further increase the total monthly payment. 

Cons of leasing: you don’t control the property

When you don’t own your commercial property, the landlord will be the one calling the shots. The decisions they make at any time in your lease agreement can directly impact your business. This could include increased monthly payments, unexpected lease termination, and more. Not being in control of the property adds a layer of uncertainty to your business that owners won’t be affected by. 

Cons of leasing: costs may increase

The biggest uncertainty you’ll face as a renter comes at the end of your leasing term. The landlord could decide to increase your monthly payments with a new lease or may decide not to renew the lease at all. This could put you in a bind and leave you scrambling for a new property while trying to maintain your business as usual.  

Leasing Vs. Buying Commercial Real Estate

Find the best fit for your business with Jones Aur

Acquiring commercial real estate is a big step in growing your business! There’s no blanket right answer to buying vs. leasing, which is why it’s essential to work with a seasoned commercial real estate brokerage like Jones Aur. Our associates have decades of combined experience putting the right people in the right place at the right time here in Memphis. We’ll help you assess your business needs to decide which path is best for you, then find the perfect commercial property for you to lease or purchase. Reach out today to get started!