Should I Buy or Lease my Commercial Property?
February 24, 2023
Finding the right property for a company is essential to its success. Location is critical, but there are other things to consider. Business owners often wonder, “Is it better to lease or buy commercial property?” It’s an important decision that has significant long-term effects on company profitability. The answer, of course, depends on many factors, including the state of the economy, business growth projections, tax advantages, and acceptable risk. Before deciding whether to buy or lease, business owners should consider these and other concerns.
Benefits of Buying Commercial Property
Purchasing commercial property has some clear advantages over leasing, especially if the company has solid financials and a history of steady growth.
When a company owns the property, the owners are free from specific concerns, such as losing their lease—owning means never worrying about moving expensive equipment or fixtures or shutting down operations until the move is complete. Company representatives can purchase a site that fulfills their needs or renovate a space to meet specific requirements, removing the worry that if the landlord decides to sell or rent to someone else, the company will need to move.
Real estate is often a profitable investment. Companies can benefit significantly from property appreciation, especially if the facility is in a desirable location. Although the value of commercial property decreased at the end of 2022, that drop was atypical. Commercial property value increased by 18.6% in recent years, making it a reliable long-term investment.
Additional Financial Benefits
Owning commercial property can be financially beneficial in other ways as well. In some cases, owners can sublet a section of the property to generate more income, becoming a landlord instead of paying one.
The property can serve as collateral for expansion loans or other borrowing situations. It is usually a dependable financial asset. In addition, purchasing commercial property often has tax advantages that can save the business money.
Benefits of Leasing Commercial Property
While owning commercial real estate has benefits, it also has drawbacks. So when considering whether to buy or lease commercial property, company owners should pay attention to the benefits of leasing. The following conditions make owning property less desirable.
Industry Market Conditions
The current economic situation is still somewhat volatile, especially for some industries. The recent downturn may stop short of a recession, but if conditions worsen, the real estate, manufacturing, retail, construction, and hospitality industries may suffer the most. Leasing instead of buying may be the wiser and more flexible choice for companies facing more significant financial uncertainty.
Declining Property Value
As noted before, commercial property values have recently dropped and may continue to do so in the short term. If a business owner is more risk averse about their company’s growth and long-term success, they should hesitate before committing to a mortgage. They may not be able to comfortably “ride out” the temporary drop in property value.
Owning commercial property frees businesses from the power of landlords, but it brings more responsibility. Only some people want to manage a property, which includes making repairs, being a landlord to other tenants, dealing with property taxes, and dealing with other time-consuming tasks. Owning the property is a huge commitment. For some companies, having a landlord take care of the property makes leasing it more attractive than owning it.
Deciding if it Is Better to Lease or Buy Commercial Property
Business owners should consult their financial advisors when deciding whether to buy or lease commercial property. These experts can offer advice based on their knowledge of the client’s business and current market conditions, including the latest moves by the Federal Reserve and their impact on interest rates in the coming months.
There is no one answer to the question, “Is it better to lease or buy commercial property?” Every business owner will have to consider the profitability of their company, its growth potential, and the current financial environment. They also need to decide if they want the responsibility (or freedom) of owning the property.
The First Western Trust Advantage
The financial experts at First Western Trust offer their clients clear guidance about commercial property purchases. Their commercial banking and corporate lending program work to minimize their risk while maximizing the value of a business. They provide custom corporate loans that match an organization’s needs, including commercial real estate purchases.
First Western Trust also offers private banking services and planning, trust, and investment management. They are dedicated to protecting and growing the wealth of corporations, individuals, and families. Contact First Western today for more information about their corporate banking program and other services.