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Leasing vs. Buying Commercial Real Estate

If you’re ready for the next stage in your business’s growth, there’s a good chance you’ll need more space.

As you look for the right place for your business, your main focus will probably be “location, location, location.” True, proximity to your customers and employees will be a priority, but there’s another key decision that will influence how well you can maximize the benefits of your commercial property: whether you lease or buy.

Over the long term, buying commercial real estate is typically more cost-effective. That said, each option has its advantages and potential drawbacks that you’ll need to consider with respect to your financial and operational needs.

Timing is one big factor. Your real estate plans should be informed by a solid understanding of the current real estate market, as well as the lending landscape, which will affect the availability of suitable properties within your business’s budget and the potential cost of commercial financing.

It’s important to determine how soon, and for how long, you will need your new space. The urgency of a move or acquisition may influence your decision to buy vs. lease.

Leasing a Commercial Property

When leasing property, the main benefit your business will enjoy is greater flexibility. Whether you need office, retail, or warehouse space, a commercial lease may give you more options down the road, as well as help you avoid the significant responsibilities that come with owning your own business property.

Leasing can help you to: 

  • Avoid tying up capital in a major asset, and keep lines of credit open
  • Fully deduct your business’s lease payments as a business expense
  • Expand and reduce the scale of your operations as necessary, based on your business cycle
  • Remove the common risks associated with property ownership
  • Relocate to a space that’s a better fit (or better price) at the end of the lease term

Disadvantages of leasing commercial property include the lack of control over cost, as well as a potential lack of available properties meeting your business’s specific requirements. Also, rising rents can make leases expensive to renew, and changes by the landlord may force your business to relocate at the end of the lease term.

Buying a Commercial Property

Two of the biggest advantages of buying real estate? Dependability and control. That’s why investing in a commercial property is often advised for established companies looking to meet future, as well as current, office space requirements.

Purchasing can help you to:

  • Potentially realize investment/capital gains as the property value appreciates
  • Avoid exposure to rising rental costs  
  • Take advantage of tax deductions for commercial mortgage interest and annual depreciation
  • Tailor the property to your needs without landlord limitations
  • Sublet the property or some of its units for additional business income
  • Have more control over how the property is used

However, the decision to invest in real estate comes with larger upfront costs, as well as additional legal, regulatory, and maintenance responsibilities.

Carefully consider your business’s immediate and long-term goals. Also, be sure to seek guidance from a real estate attorney and tax expert about the legal and financial implications of buying vs. leasing commercial real estate.

Ready to purchase or refinance a commercial property? Connect with Royal Credit Union’s knowledgeable local lending team to discuss your commercial real estate needs.

This information is for general informational purposes only and does not constitute tax, legal, or business advice. Commercial loans are subject to credit review and approval. Please consult with your tax advisor or attorney when deciding upon commercial financing options.