To buy or to lease … the eternal question. Deciding whether to buy or lease commercial property to occupy is one of the most impactful decisions you will make for your business.
Stumped? Don’t know which way to go? This short guide will help you direct your thinking towards the best option for your commercial real estate occupancy needs — lease or buy.
Don’t underestimate the joys of not having a landlord to report to anymore. Landlords can raise rents, renegotiate leases, and dictate how the space gets used in any number of ways. If you’re tired of landlords, or if you want to start your business with more autonomy, buying may be the right choice.
That being said, owning property doesn’t mean you can do anything you want with it. City codes and zoning will place some restrictions on you — especially the environmental codes that apply to industrial property. But there’s no getting around it — ownership comes with a lot more freedom to do as you please.
Owner-occupants of commercial real estate don’t necessarily see themselves as “real estate investors.” They simply decided that owning their commercial space is the better business decision compared to renting it.
Nevertheless, that commercial real estate is an asset that can live on the company’s books, or even on the owner’s personal books. If you buy right, it can appreciate in value, building the company’s market cap or the owner’s personal wealth. That appreciation can even be harvested through refinancing, an easy source of working capital.
Location is everything for many businesses. If a company finds the perfect location for its commercial space, it’s natural to want to burrow in like a mole and never leave.
But leases — even long leases — are by their nature temporary. If the landlord decides not to renew, you’re out of luck. It’s much harder to dislodge your company from its perfect position if you own the property.
Compared to residential leases, commercial leases come with many expenses, including outlays for property taxes, insurance, and common-area maintenance. Commercial tenants are even responsible for building out the entire interior — all the landlord provides is four walls and some utility hookups.
If you’re going to pay all those expenses and buildout costs, why not spend it improving property you already own? Generally speaking, commercial building owners can expect to pay fewer occupancy costs than commercial tenants.
Many commercial lease agreements amount to profit-sharing for the landlord. The greater your revenue, the greater your rent payment. By contrast, a commercial mortgage is a fixed expense. That means the greater your revenue, the bigger your profit margin.
There’s no getting around it — the biggest barrier to entry for commercial buyers is the down payment. That’s a big upfront cost. Buying may save you money in the long run, but if you need that working capital to stabilize and expand, leasing may actually be the better choice for the time being.
Buying isn’t wise for newer businesses or businesses that are still in a rapid growth phase. You could end up outgrowing the property to which you committed all that capital. Alternately, an unexpected cash crunch could require your business to tighten its belt and ride out the lean times — hard to do with a fixed real estate expense. In either circumstance or a variety of other circumstances, you may be thankful for the flexibility of a lease compared to owner occupancy.
Although commercial tenancy can be more cumbersome than residential tenancy, the landlord still takes on many responsibilities for property maintenance and operation. Commercial tenants don’t have to take on any of those responsibilities — they are free to focus like a laser on growing their business.
The time and human resources saved by leasing instead of buying are valuable assets — assets that can be even more valuable than the value of the real estate itself. If you can leverage that asset, the growth in revenue may make the extra leasehold costs seem like a drop in the bucket.
Interest rates have been historically low for years, but those days are rapidly becoming a thing of the past. National banks in Canada, the US, and elsewhere have ratcheted up their overnight rates. Higher lending rates are already here, and they can only get higher. Time is running out to take out a commercial loan at the lowest interest rates we’re likely to see for a while.
Real estate typically lags behind other markets … but when stocks dump, a dump in the real estate market may be coming. It’s not guaranteed, but it’s something to look for. If real estate prices dip, that’s a good time to buy.
Buying is a long-term commitment. It’s really only smart to consider buying your commercial space over leasing if you have had stable cash flow for several years. If you’re still growing and stabilizing, buying may not be the right choice for you at the moment.
Few companies are fortunate enough to have a cut-and-dried decision between buying or leasing. Several of the conditions on one side of the decision may apply to your business, while other conditions stack up on the other side.
If you need professional help making the decision, please don’t hesitate to reach out to me. We can jump on a call, set up a virtual conference, or meet in person if the circumstance allows it. We can weigh the pros and cons and come up with the best commercial real estate action plan available to you.
Once the decision is made, I can even take the reins of your real estate search, at no charge to you. I have decades of experience locating the right commercial property for a variety of companies across Ontario — for sale or for lease.