Lease or Buy: What is the Better Option for a Commercial Investor?

The decision of leasing or buying a commercial property is one of the most important choices for investors. Each option has benefits and risks related to it. Leasing is related to flexibility while buying is suitable for stability.

When we talk about commercial real estate investment, the dilemma before us comes as whether to lease or buy a property. Both options have their own financial benefits, and risks. The right decision depends on many factors such as investor’s goals, available money, market conditions, and the types of business.

In this blog, we will discuss the different aspects of leasing and buying commercial properties. We will also find their impact, and suitability in different situations.

Understanding the Difference: Lease vs. Buy

Leasing

Leasing is about renting a commercial property from its owner for a fixed time period. It is based on an agreement by which rent, maintenance, and renewal terms are decided. It provides flexibility to investors.

Buying

Buying simply means the ownership of the commercial property. It happens either through full payment or through a loan. Ownership provides stability, and benefits of future price increase of the property.

Both these ways are common in commercial real estate. The choice depends on financial objectives and risk tolerance capacity of the people involved in it.

Advantages of Leasing Commercial Property

• Leasing needs less capital in comparison to buying. Investors can utilise their remaining funds in other essential things or operational expenses.
• Businesses face rapid changes. Leasing makes it easy to relocate the funds when the lease term ends.
• In most of the cases property owners take the responsibility of maintenance and repairs. This reduces operational burden.
• Lease payments are helpful in reducing overall taxable income.
• When the economy faces a tough situation, tenants are not affected by decrease in property values.

Disadvantages of Leasing Commercial Property

1. Tenants don't get the benefits of property values rising like owners.
2. Over time rising rentals can lower the benefits of leasing.
3. There are several restrictions in leased property, and tenants have limited control on it.
4. At the end of lease term, renewal depends on the landlord's desire, which creates the uncertainty in the long-term.

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Advantages of Buying Commercial Property

• Buying makes you an owner, and monthly loan payments work as investment. You get long- term benefits, when property prices increase.
• Monthly payments are predictable and you don't have to face the fluctuating rental costs. This brings stability to long-term planning.
• Owners have complete control over the property. They can renovate, expand or lease out the portion they want.
• Owners can get the benefits of tax deduction and can reduce taxable income.
• An investor can use some part of the property for self-purpose and other part of the property for rental income.

Disadvantages of Buying Commercial Property

1. Buying requires much investment, and it also consumes the money which could be used for other important purposes
2. It is not easy to sell a commercial property quickly, when you require it.
3. Ownership makes you responsible for repair and maintenance of the property.
4. If the price of the property decreases, the owner bears the loss directly.
5. When most of the money is involved in buying, you have less opportunity to invest in other places.

Key Factors to Consider Before Deciding

When you decide between leasing or buying, you should think of following factors:

• For short-term leasing is better due to flexibility, while for long-term, buying is more beneficial.
• If you have limited resources, leasing is better than buying.
• Rapidly changing business is better suited for leasing, while stable businesses are suitable for buying.
• In uncertain markets, leasing minimised the risk, while in stable markets buying provides the benefits of price increase.
• Both leasing and buying can provide tax benefits, if you follow proper guidance from a tax adviser.

Leasing vs. Buying: A Scenario Analysis

• A new business with limited resources should lease the property.
• An established business with long-term growth in mind should buy the property.
• Sometimes a mixed approach is better for you. You can buy more property than you need. In that situation you get the benefits of both ownership and rental income.

Conclusion: Which is Better for Commercial Investors?

There is no exact answer to whether leasing or buying is the better option for commercial investors. Leasing provides flexibility, and you get less burden on your pocket. It also saves you from market risks, which makes it better for fast-changing industries. Buying, on the other hand, consumes more money, provides stability, and long-term wealth, which makes it better for established investors. The choice depends on your financial capacity and business plans.

Think of your business, and the duration for which you need the property. Decide whether you can go for the long-term or you need immediate benefits. By thinking about all these situations, you will find the right answer between leasing and buying.

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