People often ask us why tenants choose to lease commercial property rather than purchase it. The easy answer is that everyone has different reasons depending on their individual needs, the type of business they’re running, how much capital they have, and the current market conditions. However, some reasons are more common than others.
Based on our experience, we have identified the ten most common reasons owners choose to lease instead of buy. We suggest strongly considering how each of these apply to you and your business, as they all are crucial considerations when making the lease vs. purchase decision.
- Save capital to run your business. This is especially applicable to startups. Of course you plan for your business to be successful enough to support mortgage payments and additional operational costs, but there’s inherent risk involved when launching a business. Additionally, buying commercial property can create a lack of liquidity and limit your ability to take advantage of new opportunities that present themselves. It’s important to consider allocation of capital. What’s the most important thing for your business to invest in? Machinery? Office space? Talent? Patents? Leasing also frees time to concentrate on core business objectives rather than property management.
- Rental rates are still cheaper than if you buy. Not only can commercial mortgage payments be pricey, but buying property requires a large sum up front. For example, renting a $500,000 commercial property may cost $4,000 per month, but to purchase it would be approximately $150,000 down, then monthly mortgage payments plus additional costs such as insurance, maintenance, upkeep, labor, etc. This is likely to be a stretch for a business just getting off the ground and still looking for capital.
- Availability of prime real estate. If you are looking for a “Class A” building with state-of-the-art functionality and design, infrastructure, life safety, and mechanical systems, located in the most desirable area, you may have a hard time finding one for sale, whereas finding one to lease is significantly easier, typically.
- Short time frame on contracted work.
- Scope of responsibility. When you lease, the landlord handles all the day-to-day problems that come with ownership. This includes maintenance and repairs, cleaning and hiring a cleaning service, as well as certain risk factors such as obsolescence, decrease in property value, and cap rate volatility.
- Neighbors with benefits. Working in a business park opens doors to other neighbors who could become potential business relationships. Office parks are typically home to businesses in a variety of industries. This is a great way to meet potential clients, vendors, or partners.
- Expansion. Do you know exactly what your business will look like in five years? Or ten? Purchasing a building is a huge investment and commitment. If you’re growing a team but uncertain of how quickly it will grow, renting is likely a better option for the time being.
- Flexibility. In addition to allowing flexibility for growth, leasing also lets you remain flexible in selecting a location. Let’s say you’re a small business owner and you decide to relocate the business to a city with a stronger talent pool, or you find that business development opportunities are much stronger in a different market. Although the physical chores of moving can be a headache regardless, waiting till the end of a lease is over is a much simpler process than selling a property and potentially losing on your investment.This can also be applied on a more micro level. For example, as you increase profitability, you have the option to move into an ideal space in a more prestigious area of your market. In certain industries, this can have a substantial impact on your brand image.
- On-site management to assist with problems. Not only can you avoid bearing responsibility for repairs when you lease, but commercial real estate management is expected to fix problems very quickly, especially in larger business parks. This can be a huge benefit when on tight deadline and something goes wrong, or if there’s an urgent fix while a client is visiting the site.
- Barrier to entry. When shopping for commercial real estate, you’ll notice a large majority of leasing options over purchases. This is particularly true for high-demand areas.
As a responsible business owner, we understand that you still need to see the numbers to make an educated decision in the lease vs. buy dilemma. If you would like to see the rental analysis vs. purchase analysis, call us at (727) 577-5390. It’s free!