Commercial property leasing can be a great way to get started in the world of business if you are looking for affordable and short-term office space. It can also be a great way to expand an existing business and grow your customer base.
However, commercial property leasing is not for everyone because of its potential drawbacks.
There are many pros and cons of this type of lease, so it is important that you consider all the factors before making a final decision on how to proceed with your business plan or plans in general. By understanding both sides of the equation, you can make an informed decision about whether or not commercial leasing is right for your business.
Leasing Commercial Property
Leasing commercial property can be a great way to get started in business without having to purchase or build your own space. There are a number of pros and cons to leasing, so it’s important to weigh the options before making a decision. The following are some of the key pros and cons to consider:
Pros
The advantage of leasing a commercial property is that you have little responsibility for maintenance and repairs. It allows your business to be more flexible in terms of location because you can easily move to another place once the lease expires or if their needs change.
Also, leasing is more affordable in comparison with owning a commercial property because it does not require any initial investment or down payment while renting only requires monthly payments, which can be adjusted according to the budget of your business.
Cons
The disadvantage of leasing a commercial property is that you have no control over the terms and conditions of the lease. If your business is not doing well, then it can be difficult to break the lease and move out from that location which may result in financial losses for both parties involved — for example, landlord will lose rental income while you will incur additional expenses such as rent until new tenants are found.
Owning Commercial Property
A commercial property can be a great long-term investment for your business. When you own the property, you have more freedom in how the space is used and what happens to it. Here are some of the pros and cons to owning a commercial property:
Pros
The advantage of owning commercial property is this allows you more freedom in managing the expansion of your company. As you earn ownership of your commercial property, it becomes a more valuable asset that you may use to expand your business without affecting it.
Also, it allows you to extend your business hours as much as possible because there are no restrictions on the use of space when you are the owner of it. As an owner, you have the option of selling the underlying property when you retire, or you can sell the practice simply and lease the commercial property, generating an ongoing income stream.
Cons
The disadvantage of owning commercial property is that it can be expensive to maintain, and you are responsible for any repairs or maintenance needed. You also need to have a large amount of money saved up as an initial investment to purchase the property and will need to pay for taxes every year, which might not be feasible if your business does not generate enough income.
Also, if your business fails, then all assets, including real estate, will belong to creditors and other parties who have claims against them like taxes owed to government agencies such as the IRS, among others which means this could potentially result in a forced sale of the property.
Why Do Companies Lease Buildings Instead of Buy?
Purchasing or leasing office space is one of the most important financial decisions a company will ever make. Companies lease buildings instead of buying for many reasons such as:
- Cheaper: The most obvious reason why companies lease buildings is that it is cheaper than buying. Property leasing can help companies avoid large up-front costs and long-term debt obligations associated with purchasing a property, so businesses are able to get the most out of their real estate investment dollars.
- Extra flexibility: Leasing is often more flexible than buying because it allows a company to move into or out of space as its business needs change. This can be especially important for start-up companies, which often experience rapid growth or changes in their business model over time. Lease agreements can be structured to fit a company’s needs with respect to time and space while at the same time allowing for flexible renewal options.
- Big tax benefits: Lease payments are considered operating expenses and can be deducted from income taxes. This can represent a big tax benefit for businesses that lease rather than buying their office space. Leasing is a great way to help businesses manage their cash flow and take advantage of certain tax deductions that are not available through ownership.
- Cost stability: This is ideal for companies that need to budget accurately over long periods of time. Companies know exactly how much they will pay each month and can plan accordingly. It provides stability for a company’s long-term real estate costs and allows the business to lock in its rent payment for several years, helping to plan its budget with greater certainty.
- Finance options: Commercial landlords are often more creative in structuring lease deals that meet the needs of their tenants. This includes offering different types of flexible financing options, such as tenant improvement allowances and rent concessions. Because leasing is less expensive than buying, companies can use their extra capital to finance other business investments.
- Exclude hassles: Leasing is a great way to transfer hassles and risks of commercial real estate ownership such as management, maintenance, and repairs from the owner’s shoulders to those of property managers or landlords. It also can allow companies to avoid the expensive renovation and remodeling costs that often come with purchasing an older building or a property in need of repairs.
- More time-saving: Property leasing allows business owners to save both money and their valuable time by avoiding the process of buying property. The process of purchasing property can be long, tedious, and confusing. Property leasing enables small business owners to avoid the process of buying a building or office space and instead focus on their core business activities.
- Focus on business: The most important advantage for companies leasing buildings is that it allows businesses to focus their time and attention on what they do best — running the business. While property managers take care of the building, companies can focus their time and resources on what they do best: running their business.
The Cost-effectiveness of Leasing vs Owning Commercial Property
The cost-effectiveness of leasing commercial properties rather than owning them is pretty straightforward. If you lease a property, then you are paying for the use and upkeep over time as part of your monthly payments. This means that there’s no need to make upfront capital investments in order to own one, which allows your businesses with limited capital to enter the market with less risk.
In contrast, if you own commercial properties, then there will be significant costs associated with both purchasing them outright, which usually requires financing and maintaining their value over time. These include things like taxes, repairs and upgrades needed due to normal wear and tear, and other unique requirements of the commercial property market that you may face in your area.
Leasing also offers more flexibility than owning in certain situations. There have been several studies showing how much more cost-effective leasing commercial property is compared to owning it. This is especially true for businesses with limited capital who want to enter the market and take on less risk at first, especially those small startups.
Because the market is very competitive and unstable, leasing a property can help you get your foot in the door with fewer upfront costs so that if things don’t work out, then there won’t be as big of an impact on your business.
Also, there is no need to make upfront capital investments in order to own one; you simply pay for the use and upkeep over time as part of your monthly payments, which allows businesses with limited capital entering into new markets more easily without having financial stress on top of everything else.
Conclusion
The decision of whether to lease or own commercial property is a complex one that should be made after weighing the pros and cons of both options. There are many factors to consider when making this decision, including your budget, the needs of your business, and the current market conditions.
By understanding the advantages and disadvantages of leasing and owning, you can make a more informed decision about what is best for your company. At the end of the day, it is important to remember that there are many factors to consider when making this type of decision, and no single answer is right for everyone.