To buy or lease commercial real estate? Your guide to the pros and cons.

Whether you are starting out and requiring your own space or your business has outgrown its current arrangement, one of your big considerations will be whether to buy or lease a commercial property.

Often this decision is more complex than buying a house. First, you’ll need to decide if you need an office or a warehouse. Whichever you choose, finding the right commercial space under the right arrangement is essential. The success of your business can often depend on the correct commercial real estate leasing or buying choice.

Deciding which option is best for your business can present plenty of challenges, so we’ve put together some pros and cons for buying vs leasing a commercial property to help you with this tricky decision.

Buying commercial property

Pros

Control and security

One of the appealing aspects of buying commercial property is that once you own it you have ultimate control over it. Want to change the layout? Go ahead. Need to extend (and have space to do so)? Not a problem. If you buy your own property you can decide how best to manage the site long-term and make changes and improvements that support your business’ growth.

There is also the added bonus of security in your location and future. There is no owner to move you out to redevelop or to renegotiate the terms of the lease. It’s yours, and you control your business’ future.

This certainty makes planning a lot easier as you’ll know how much you’ll be spending each month on the mortgage and overheads, and any maintenance or improvements are at your discretion.

Accumulation in value

Depending on how the market moves, your commercial real estate can be a lucrative investment as well as a space to operate your business.  Commercial property sales are booming in many Australian cities, so while you are busy running your business, your commercial property will potentially be growing in value – an added bonus.

If the market (or your business) does take an unfortunate turn for the worse, you can always sell the property if you need to and give your business a much-needed injection of cash.

Cons

The price – and financing

Commercial property doesn’t come cheap, and generally you are required to provide a substantial deposit up front – anywhere from 25 – 50% – depending on the type and location of the property and how much capital you have behind you.

Buying commercial property is therefore quite a big undertaking, and financing can be difficult. It also ties up a lot of your equity and cash, so careful financial modelling and analysis is required.

Lack of flexibility

It is hard to predict just how your business will grow and develop. If your business expands quickly you might find that the site isn’t adequate for the business’ needs in fairly short time. Being locked into a large mortgage can also limit your business’ growth until you have reached a point where you can sell up and find a larger premises.

Ongoing costs

Once you own the property, the costs to maintain it and in particular, modify it, are the responsibility of the owner. If you want to extend or change the layout, the cost can be significant. In addition the maintenance costs on a commercial property can be considerable, particularly if the property is not new. There are council rates and other annual costs to consider on top of the maintenance costs as well.

If you decide to buy commercial real estate, have the building inspected for structural problems so you don’t get saddled with any unexpected maintenance costs. You want to be sure you know what you are getting into before you sign.

Leasing a commercial property

Pros

Flexibility

The opposite of buying a commercial property, leasing one will allow you to change and adapt quickly to suit your business property needs. If your business should grow exponentially, you may only be tied to a commercial rental agreement for three to five years, allowing you the option to relocate somewhere else if you need to. You also won’t be restricted by the requirement to sell the property before you can move – which can add years on to this goal if the market is not right for selling.

More choice with your finances

Without your precious equity and cash tied up in a large mortgage, you will have more choices about your business’ direction and be able to respond quickly when fresh opportunities arise. For example, if you want to acquire more businesses or expand in a certain direction, you might be able to access the resources required more readily than if you have bought property. If you are an investor as well as a business owner, commercial rental also allows you to invest elsewhere.

Cons

The obvious one – rent increases

As outlined above, when you buy a property, your expenses are more predictable, giving you more control.  When you lease a commercial property your rent is most likely to increase in line with CPI each year, at minimum. Then there are further potential increases when it comes time to renew the lease.

Less control

When you enter into a commercial rental arrangement you are subject to the decisions of your landlord, who may decide to sell or renovate the property. This could see your business moving to a new premises which can be expensive but worse, may also impact your customers and hurt your profitability.

You’re paying off the property owner’s mortgage

For some, buying commercial property is not an option anyway. But for those who lease, the rent can be anywhere from a few hundred dollars a month to hundreds of thousands annually. Whatever it costs to rent a property, the bottom line is that you are paying a lot of money to help pay off someone else’s mortgage.

So what’s the answer? Should I buy or lease?

We’ve given you just some of the key points to consider when weighing up the commercial real estate leasing vs buying conundrum. However, the answer will be dependent on many variables such as the size, nature and stage of your business – and your business goals. HKC Property Consultants can help you to find the best commercial property for your business. Contact us today for a complimentary consultation.