At some point, every tenant is faced with the dilemma of deciding whether to lease or buy his or her real estate facilities. What are the advantages and disadvantages of each? While every business is different, there are a few common factors that should be taken into consideration when evaluating whether to buy or lease office space.
Comparing the benefits of leasing versus buying from a cash standpoint is an important step, while looking at the businesses future needs. The long term space requirements are also an important part of deciding whether to lease or buy.
Often, when beginning a business, leasing appears more appealing. Cash flow is the main reason. When a tenant is purchasing office space, it takes a larger portion of cash up front, typically a down payment between 25% and 30% of the purchase price, depending on the lender and credit, plus closing costs. What is the opportunity costs for those dollars if used in your business? Most business owners facing this decision for the first time, the thought of borrowing money to buy commercial property is as intimidating and overwhelming as it is for a first-time homebuyer. Ownership can also bring its separate set of headaches – being responsible for maintenance and operations have a great deal of impact. It’s time away from running the business should you decide to manage the property yourself.
But buying office space certainly has its advantages. Developing equity in a building or office space can be a sensible way to grow your business or personal wealth portfolio. Business gets complete control over their property.
Real estate market research considers those factors that affect the supply and demand for a particular type of space within the specific market area. Conducting this research is a vital step in deciding to buy or to lease because the property must be a good real estate investment if it is purchased. Market information is crucial to negotiating a competitive lease if the property is not purchased.
If rental rates are expected to rise (or fall) during the analysis period, property values should rise (or fall) as well. When it is concluded that rental rates and property values will increase, buying the property is supported and vice versa. Because these conclusions are so important for the financial analysis, the data used to reach them must be carefully developed through market analysis.
But before any decision is made, do the homework; know the pros and cons of both buying and leasing.
Don’t need to worry about selling if moving to a new location.
You have the freedom to move if need be at the expiration of the lease.
No loss if owning in a bad market.
Rental rates with annual escalations based on market conditions.
Loss of the reversion or the value of the property at lease end.
No equity build up.
Tenant may HAVE to move at the end of the lease.
Changes can be made to the building to accommodate your business.
No rent increases.
You can benefit if you sell when the market is good.
If you end up with excess space, you can lease out the extra.
You can stay at that location as long as you wish.
Usually requires a more initial capital to secure financing
Property values may decline
Requires owners to invest much time and energy in matters that are not its business, unless property is part of a unit owners association
Inexperienced owners operate their real estate inefficiently and increase operating costs.
While the decision to buy or lease may seem difficult and overwhelming, there is help. The first step is to receive advice from a commercial real estate professional who knows the business and the market. Getting advice and assistance from a commercial real estate professional who is involved in the business day in and day out can significantly improve your chances that you will end up in the perfect space at the right price. Many of the lease vs. buy factors can only be decided by you, but having a helping hand in the necessary areas where office expertise is important will assure you of making the best possible decision.