Should You Buy or Lease a Commercial Space?

Navigating the commercial real estate market is similar to residential in many ways, but it involves more in-depth decisions and analysis. Today, we’ll talk about whether it’s better to buy or lease a commercial space. Either option has advantages and disadvantages based on the type of investment you are making.

Deciding between them will depend on your goals for the property and your risk tolerance. Some investors are heavily involved with the day-to-day operations of their business. Others take a hands-off approach with minimal personal interaction. The purpose of this post is to help you analyze your resources and your objectives to find the right opportunity just for you.

There are similarities between investing in residential and commercial real estate, but there are also several key distinctions to be aware of. Learn more about our commercial expertise right here.

What Type of Property Do You Plan to Buy?

Before you start looking at potential properties, you’ll want to carefully review your long and short-term business goals. Where you set up shop depends greatly on how established your company is and what type of premises you need for your operations. For example, if you’re a brand-new start-up and are just testing your ideas, you might not be ready to commit to a purchase.

On the other hand, if you’ve got a proven business and are expanding or opening a new location, you’ll have a much clearer picture of the type of property you need. The option to buy becomes much more feasible if that’s what you prefer. By thoroughly analyzing every aspect of your business, you can choose the best path forward. Consider the following questions.

Is the property for an existing business or a new venture?
Do you plan to run your own business on the premises or lease it out to another company?
Have you run a thorough cost versus profit analysis?
Is your business currently turning a profit, or are you still in the growth stages?
Will you run the business yourself or have a management team run it for you?
Do you plan to stay in the business for a long time, or do you have an exit strategy in place?

Are you ready to learn more about the incredible opportunities within commercial real estate? The posts below will provide you with some valuable insights:

The Risks and Downsides of Leasing a Commercial Building

Leasing your building may be more accessible than buying, at least at first, which can make it an attractive opportunity. However, there are some misconceptions that could make the idea seem easier than it really is. Here are a few considerations to keep in mind before signing a contract.

Like with a residential home, you will have no equity gains when leasing a property. Rising real estate prices could lead to increases in your rent and potentially make your business less profitable.
You will have less control over the premises as all building upgrades and renovations will first need to be cleared with the landlord or property management company.
You are committed to what may be a long-term lease. Even if your business idea doesn’t take off, you’ll still have to cover your agreed-upon rental payments. Subletting may be an option – if your contract allows it. Otherwise, breaking a lease early could lead to costly penalties.

The Advantages of Leasing

Once you understand the potential downsides of leasing a property, you can be more realistic about the opportunities. And there could be many upsides, especially if you want to move quickly to the next phase of your business.

Leasing requires far less cash up front. This lower barrier to entry might be what allows you to finally bring your products and services to the marketplace.
The process is more streamlined, which allows you to get up and running quickly.
With less investment required, you can reinvest back into your business and grow faster.
You could leverage your capital into multiple projects to diversify your investments.
Even if your business doesn’t take off as planned, there is less financial risk involved with leasing a property than buying.

Whatever path you pursue, expert guidance is essential for your success. Here’s Why Everyone Needs a Real Estate Agent For Life.

The Downsides of Buying a Commercial Property

Advantages of leasing aside, some people just prefer the sense of control and autonomy that comes with buying their property. The stakes may be higher, but so is the potential for reward. First, let’s take a look at the possible drawbacks of purchasing your building as opposed to leasing.

Commercial real estate is more expensive than residential. Many lenders also see it as riskier, which means they typically require more of a down payment. No matter how you look at it, you will need substantial capital to buy rather than lease a property.
Buying ties up more of your money that you now cannot invest elsewhere. This could become an obstacle if you are hoping to expand quickly.
Commercial transactions can be complicated and take a long time. Can you afford to wait to move forward with your idea?
You have more on the line if the business is slow to launch or it takes longer than you realize to find a suitable tenant. Money isn’t coming in, but you are still responsible for all of the carrying costs until you turn a profit.
Owning comes with more responsibility. You are in charge when things go right, but also when they go wrong.

Is industrial real estate right for your situation? Check out our post How to Invest in Toronto Industrial Real Estate.

When Should You Buy Instead of Renting

Like buying a house, the decision to own rather than rent comes down to your goals and the resources you have to achieve them. The rewards are also similar.

The primary advantage of buying over leasing comes down to equity. Even if your business isn’t as profitable as you’d hoped in terms of sales, the land itself will grow in value and add to your net worth.

Commercial real estate prices can fluctuate, but they tend to go up over time. As your purchasing power grows, you can pull out some of that equity, refinance, and then reinvest in another property. There is almost no limit to what you can accomplish.

If you leave a business after renting, the value of your sales is all you have to show for it. When you own your building, you can often exit your business at a significant profit. Whatever path you choose, an experienced commercial real estate agent can help you assess the risks and the potential for gain.

Do you want to explore the many opportunities in commercial real estate in more detail? My team is happy to guide you and help you achieve your goals. Connect with me at OMarjanovic@kw.com or call 647.620.2882 to take the next step.