Pros and cons of buying vs. leasing commercial property
| May 13, 2015
The most common reason tenants lease space instead of buying a location is because 95 percent of all commercial, retail and office space is for lease and not for sale. Commercial landlords prefer to have long-term rent-paying tenants.
If you are in an enviable position to purchase property, there are several opportunities available to you: a business condo where you occupy the one unit, a strata title unit, small strip plazas or centers where you're now a landlord to other tenants as well, or standalone buildings on a small parcel of land. Major factors that impact this decision for the average tenant are the long-term commitment of purchasing a building and the ability to obtain the financing.
For those tenants able to purchase, here are a few pros and cons to consider.
- Paying a mortgage is better than paying rent. Lease payments are forever, but your mortgage will eventually be paid off. Often, your mortgage payment may be close to your rent obligation.
- In most cases, you will gain equity in your property. Over the course of time, your property may double — or even triple — in value. This increase in value is in addition to the value of your business contained within the property.
- You're in charge. You don't have to deal with the hassles of a landlord or property manager.
- There may be some sacrifice on location, because many of the prime locations may not be available for purchase.
- If you're vacating an existing location, you may be leaving a great opportunity for a competitor to move into your location.
- Being in charge is a con as well as a pro. When you purchase property, you're the one responsible for all repairs and maintenance that a landlord would normally handle.
When making the decision to purchase or lease commercial space, don't make the decision to buy simply for the sake of owning real estate. Only consider purchasing a space or property if you would be prepared to lease that same location anyway.
Also, when deciding to purchase or lease, remember to think outside of the box. What we mean here is consider all opportunities — both conventional and unconventional. We live in an "anything goes" or "whatever works" society, and that philosophy often applies to business locations as well.
When a major restaurant chain located near our office went under, the freestanding building was quickly snapped up by a group of orthodontists for new office. A big-box store can move and be replaced by a sporting goods anchor that gets one-tenth of the traffic. A chiropractor moves in where a fitness facility failed and so on.
There are both conventional and unconventional opportunities for every business industry. Perhaps a trophy location will make sense for your business? This is a specific unit that outshines all the other spaces for lease or purchase in a property because of its prominence and visibility. Trophy locations do not sell or lease cheaply. However, for some companies, having a trophy location can make their business far more conspicuous.
Do all dentists need to be located in strip malls? Do all office tenants need to be located in office buildings? Of course not. You need to evaluate every type of building or property that is available because its unique qualities can represent the 20 percent advantage your need to be successful over your competitors.
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