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Should you buy or lease a commercial space?

Should you buy or lease a commercial space?

As a business owner, one of the concerns that you will face is finding a space to run your business operations. Since there are many different kinds of businesses, obviously the type of space will depend on what requirements you need.

Setting up your own business can be exciting and challenging at the same time.

The first challenge to tackle is to work out whether to get that big chunk of loan and buy your commercial space or continue leasing.  To make your decision easier, Xynergy Commercial have compiled some pros and cons for both buying and leasing a commercial property.

Pros of Buying Commercial Real Estate

Tax Deductions

Owning a commercial property comes with mortgage interest and property taxes, which are tax-deductible. Because of this, even if the upfront costs are quite high, you would be able to get some of the costs back. If you aren’t sure about getting the most out of deducting the taxes, please contact Xynergy Commercial and we will get you in touch with a tax accountant.

Additional income

Got extra space? You can rent it out. Not only will it increase your cash flow, but you can also get the opportunity to network with other businesses. Having a commercial space is really great and stable opportunity to earn passive income. The main reason why it is stable is because usually the lease period is much longer than residential lease, allowing a landlord to have a continuous stream of income.

It’s yours, set your own rules!

You are in full control of the property so you can make any changes you like. If you are buying the space for your own business, then you would only need a dependable commercial property manager to handle all the maintenance, but other than that, you have the freedom to make your commercial space as cool as you want.

 

Cons of Buying Commercial Real Estate

Lack of flexibility

When you purchase a commercial space, unless you completely renovate it to a high-rise building, it will only be able to accommodate its initial capacity for a particular business.

Small office spaces can be inadequate when your business starts to grow.

It will be time-consuming and costly to sell and find another office space. Furthermore, if you were to lock into a mortgage, then you have no choice to surrender the chance of growing your operation.

Big financial commitment

You will need to pay much more upfront compared to leasing a commercial space. Hence, there is a high opportunity cost. You will lose the chance to expand your business in other ways. Before you make any commitments, you should consider your business goals, financial capability and make a clear plan.

Less time

It is a headache to own a property. You will have less time to focus on your business as you need to divide up your attention to property management. Unless you have a decent commercial property manager, you would need to take charge in handling all the necessities to ensure the commercial space continues to operate properly.

Pros of Leasing Commercial Real Estate

Prime property option

If you decide to lease a commercial space, you have the flexibility to choose a prime location fully tailored for your business.  Businesses like cafes and retail will be benefited a lot with the leasing option, as they are both heavily dependent on the location for success. Another possibility is if you are losing competition with another business that just opened up, you have the flexibility to relocate and gain exposure in another area. It might not be a competitor, but an unexpected situation, maybe a lot of construction going on, or a long term road block, anything that potentially holds back your revenue.

 

Lower financial commitment

Upfront expenses are much lower when leasing a commercial space. However, the costs that you can expect when leasing are:

  • Security deposit
  • Attorney fees
  • Pre-lease inspection
  • Possible broker’s fee

There is an option if you decide to buy in the end to lease it out if you don’t use it anymore, but in the end, it is your choice to find what’s the best option for you. If you found the right property, you might be able to find one that does not require you to pay outgoings, which will save you some money too.

 

Flexibility

Leasing a commercial property will allow you to have the ability to change and adapt quickly. The flexibility of leasing will give you the power to move freely and seize any business opportunities. Instead of investing a significant amount of money into buying a commercial property, you can use it to expand your business. Who knows, when you used that money to expand your business, in 2-3 years, your team would grow much bigger, and you would require a bigger office space then this one.

 

Cons of Leasing Commercial Real Estate

Rules set by landlords

As a tenant, if the landlord has specific requirements, you will have to accommodate with it. Should you require any changes to the commercial property such as the layout or design, you will need to get approval from the landlord, and it can be extra tedious when it comes to property maintenance as you are not in full control.

 

Variable Cost

Annual rent changes can happen during the time of your lease. Unlike buying, your expenses with leasing are not fixed, and it can become a lot higher as you renew the lease.

 

No equity and Potentially Higher Monthly Payments

Regrettably, rather than paying for your retirement, you will be paying for someone else’s retirement. With the leasing option, there is no equity build-up. Property value increases over time, so in the long run, owning a property will be beneficial. Also, depending on the property, your monthly rent payments could be higher than monthly loan payments, which is something you should definitely compare and contrast before making your decision.

 

To conclude, there are different pros and cons in buying or leasing a commercial space. Xynergy Commercial recommends to all readers to not put too much emphasis on the pros and cons, but rather more towards your own situation. You need to evaluate your financial situation, business capability and size, as well as the location that suits you best before deciding.

 

Featured photo by: Cadeau Maestro, Pexels.com

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Jeffrey Koby

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