Commercial property owners are often stuck with the dilemma of deciding between purchase and leasing. The decision can be challenging because both the budget and various other aspects of the acquisition and rental have to be taken into account. A substantial part of this choice is based on the business’s needs and plans.
You must also carry out thorough research to determine which of them is suitable to maintain your company’s growth. So whether it is the purchase of a shop, storage, office, or a whole commercial complex, the purchaser has to consider many factors before going forward.
If you too plan to dive in commercial real estate, you can purchase Rethink Property Investing book, an ultimate guide filled with concrete advice to ensure maximum profit with your commercial property. Besides, take note of the critical elements that can help you choose between leasing and purchasing. These will help you understand what can be more beneficial for your organization.
Location Plays a Significant Part.
Keep in mind that location is just as important when purchasing commercial space as it is when leasing. If your customer base is mainly located in a specific part of the city, you will probably continue to operate close to your current location. Your customers may not be interested in a different location. And if the market is tight, it can be hard to find space in the same area to buy.
Check The Cash Flow Analysis.
The cash flow analysis offers an excellent estimate of the amount of money you need to set aside to cover after-costs of every facility acquisition. To perform the analysis, and specific facts need to be known or supposed, including:
- Terms of purchase and funding, including closing costs
- Rent terms your federal and state income tax rate combined
- The expected useful life of the facility for your business, the estimated value of the property for depreciation purpose when you sell it, or the end of its useful life for your business
- Any other costs you would incur if you rent the facility but not if you bought it or vice versa. your capital cost (for example, if the landlord assumed responsibility for the costs, you would have to account for the expected maintenance costs)
The Impact of Buying or Leasing Costs
You either pay the amount in advance or take a business loan when you buy a commercial property. While you repay the loan, the asset’s cost is worthwhile, which contributes to the property’s equity creation. The fixed installments are paid regularly to reduce the main loan amount, and the value of the property continues to increase.
Besides, unlike a lease, the payment of loans does not increase over time. You won’t have to worry about rental walks. Once the loan is paid, you will no longer have to make payments. If you have a large commercial complex, you can even rent vacant areas on your premises.
These additional incomes can boost profits by renting them to restaurants, retail stores, etc. On the other hand, you have to make a significant deposit and monthly rent when renting a property. However, the down payment made during the purchase process is much lower.
The owner will also take care of the maintenance part and save on such costs. You will therefore have more capital available for investment in the company.
Long Term Effects of That Decision
Suppose you are a newcomer in the real estate business considering whether to purchase or lease the property. In that case, you may have the tendency to consider the short term, such as the cash flow projections within the first year that would result for each of the alternatives.
This is natural; if things don’t work well in the first year, it might not be around to witness how a particular decision would have benefit in probably ten years down the line. Having said this, it is a wise decision to consider the way rental or lease could affect your business in the future. Do you see the changes you will need to modify your business facility the way your landlord may not let you do? Will it be crucial for your premises to stay in the exact location for as long as you want?
Control Over the Facility
As the property owner, you will be granted complete control to make the expansion plans when required. Making improvements to the overall building will improve the total property value. You will be able to use your property for a many years to come, and you won’t have to worry about the spend money on upgrading the facility and renovations. It helps to save a lot of cash in the long run as the leased rooms need to be refurbished according to the business nature, which results in additional expenses.
On the other hand, you don’t have the right to the property you rent as a tenant. Your landlord can increase the rent anytime, which can significantly increase your running expenses, forcing you to relocate to another place.
Besides, all cash spend on the space improvements goes to waste as you do not own the premises. The property owner will benefit from the enhancements performed to the interiors, which tend to be fixed. The only good factor is that you don’t have to pay for the repairs and maintenance, which is the landlord’s responsibility.
Weigh Up the Risks
For business owners who want stability without a large chunk of operating capital, it might sound like a win-win solution. If you have a substantial SMSF balance, it’s a lower option to invest some of it in your premises. When all your future retirement benefits are played on single property investment, the risk level rises. Whatever your circumstances, before choosing this approach, you would be wise to obtain solid financial advice.
It might look not very easy to decide if to rent or buy, but in some way, your company has already decided for you. It’s not about making the best decision about real estate. In the end, it’s the best business decision. The commercial immobilization strategy that delivers the best results is the right one.