Sooner or later, every entrepreneur faces the need to choose between buying commercial real estate and renting it. This decision has a significant impact on the company's financial stability, flexibility, and development prospects. In this article, we will consider the advantages and disadvantages of both options to help entrepreneurs make an informed decision. We will pay special attention to purchasing real estate with a commercial real estate loan.
Buying commercial real estate on credit: advantages and disadvantages
Buying commercial real estate is a profitable investment for a business that seeks stability and is ready for long-term financial commitments.
Advantages of buying commercial real estate on credit
1. A long-term investment
Buying premises is not just an expense, but an investment. You get an asset that can grow in value over time. This is especially true in regions with stable economic growth, where real estate is gradually becoming more expensive. Ownership allows you to consider the premises as an investment that can be sold or leased in the future, generating additional income.
2. Independence and control
If you own real estate, you don't need to coordinate any changes to the premises with the landlord. This opens up more opportunities for space planning and modifications. For example, you can set up special rooms for a warehouse or production line or make major repairs without having to coordinate with other parties.
3. Fixed costs
When you take out a commercial real estate loan, you usually get a fixed interest rate. This ensures predictability and stability of expenses, which is important for long-term planning. While rents may rise in price depending on the market situation, your loan payments will remain unchanged.
4. Tax benefits
For many companies, tax benefits associated with real estate ownership are a significant advantage. For example, interest on a loan can be deducted as an expense, thus reducing taxable income. In addition, the depreciation of real estate can also reduce tax liabilities.
5. Potential source of passive income
If your business does not need the entire area of the purchased premises, you can rent out the free space. This allows you to generate additional passive income that can be used to pay off a loan or other expenses.
Disadvantages of buying commercial real estate on credit
-
High upfront costs - Buying real estate requires a significant upfront capital. You have to make an advance payment (usually 20-30% of the property's value), as well as pay additional costs such as paperwork, bank fees, property insurance, etc. This can be burdensome for companies with limited budgets.
-
Market-related risks - Commercial real estate prices are subject to fluctuations. In the event of an economic downturn, the value of your premises may decline, which creates an additional risk, especially if you plan to sell the property.
-
Lack of flexibility - Owning real estate reduces the company's mobility. If the business grows or needs to move to another city or region, selling the premises can take a lot of time and effort. In this case, renting looks much more convenient.
-
Additional maintenance costs - Owning a property means that you are responsible for all the costs of maintaining the premises. This includes paying for repairs, utilities, and insurance. Such expenses can become an unexpected financial burden if not taken into account in advance.
Commercial real estate lease: advantages and disadvantages
Renting is a more common option for young companies or businesses looking for maximum flexibility.
Advantages of renting
1. Minimum initial costs
Renting does not require a large initial investment. You only need to pay a deposit and the first month's rent. This allows you to focus more resources on business development rather than on purchasing premises.
2. Flexibility.
A lease gives you the freedom to change your location according to your business needs. For example, if the company expands, you can move to a larger space. This advantage is especially important for businesses in fast-growing industries where needs can change every year.
3. No responsibility for maintenance
The landlord is usually responsible for the maintenance and repair of the building. This relieves you of additional financial obligations and allows you to focus on your core business.
Disadvantages of renting
-
Lack of own assets - Unlike buying, renting does not allow you to accumulate assets. All rental expenses go to the landlord, and you do not receive any financial benefit from the growth in the value of the premises.
-
Cost volatility - Rental rates can increase over time, especially if the space is located in a popular area. This makes long-term budgeting difficult.
-
Restrictions on the use of the premises - The landlord may impose restrictions on the use of the property, which makes it difficult to make changes to the premises. For example, some lease agreements may prohibit redevelopment or installation of additional equipment.
What to consider when choosing between a loan and a lease?
The right choice between buying commercial real estate on credit and leasing depends on several key factors that reflect the specifics of your business, its financial condition and future plans.
1. Business size
The size of your company is an important factor when making a decision. For small companies that are just starting out, renting may be a more appropriate option. This is due to the absence of large upfront costs required to purchase real estate. In the case of a lease, it is enough for a business to provide a security deposit and pay the first month's rent, which greatly simplifies the process of entering the business space.
Large corporations or companies with stable income and significant financial resources can afford to buy commercial real estate on credit. For them, owning their own premises provides control, stability and the ability to adapt the space to their needs. In addition, the acquired real estate becomes part of the company's assets, which improves its financial statements.
2. Level of income
The level of business income is critical when choosing between a loan and a lease. If the company has a stable and predictable income, it allows it to confidently service the loan and withstand possible financial risks associated with real estate ownership. In particular, regular loan payments can be calculated in such a way as not to exceed a certain percentage of the company's profit.
If the business's income is unstable or seasonally dependent, leasing may be a safer choice. In this case, the company avoids liabilities to banks and the risks associated with a possible decline in income. In addition, renting allows you to avoid the costs of maintaining and repairing the premises, which is a significant advantage for an unstable business.
3. Duration of use
The length of time the company plans to use the premises is also an important factor. Buying real estate is usually justified for businesses that plan to operate in the same location for more than 10 years. In such cases, the cost of purchasing the premises and servicing the loan is offset by the absence of rental payments and the possible increase in the value of the property.
For shorter periods, renting is more profitable. If a business plans to change its location in 3-5 years or is considering rapid expansion, renting provides flexibility and avoids the additional costs associated with selling real estate. In addition, renting is suitable for companies that want to test a new market or assess the feasibility of operating in a particular region before making large investments.
Taking these three factors into account allows you to assess your business needs and make a rational choice between buying on credit and renting commercial real estate.
Conclusion.
The choice between buying and renting depends on many factors. A commercial real estate loan is a smart choice for stable companies with long-term goals while renting is suitable for flexible and dynamic businesses. Before making a decision, carefully weigh all the benefits and risks of each option, and consider your company's financial position and market situation. Use the services of Office Finder to ensure the success of your business.