Pros and Cons of Buying vs. Leasing Space for Commercial Tenants

Choosing your business idea and identifying your target customers may have been easy; however, finding a place to hang your shingle can be much more difficult. As a new entrepreneur, one of the critical issues you will be faced with is site selection for your business. You will learn that there are two options when looking for a home for your new business; you may lease or purchase commercial property. Which choice is better? Much of this depends on your own situation, comfort level, and future plans. Yet another consideration is that leasable space is more plentiful while property for sale is more limited.

Having many years of coaching and consulting experience working with business owners, we have heard this dilemma often. It is to be expected that many entrepreneurs waver over the options of leasing and buying commercial space. Both options have their benefits and drawbacks; however, entrepreneurs are often required to lease space as commercial properties are rarely listed for sale.

We recommend weighing the pros and cons of buying vs. leasing commercial property carefully before you open for business. Below are just a few points to keep in-mind when considering purchasing property.

Pondering the Pros

1. Paying a mortgage can prove to be better than paying monthly lease payments. With a mortgage, you can foresee an end, while your lease payments will continue for as long as you remain a tenant in the property. 
2. Your property equity will increase. Over the course of time, property becomes more valuable and property owners have the option of selling – often netting a handsome profit! Note that when mentioning property equity, we are referring to the value of the real estate (rather than the value of the business). This appreciated value will differ depending on where you are located.
3. Property owners have more control. You won’t have to, potentially, chase after a landlord to discuss a problem or have something repaired. Furthermore, owners are not bound to set operational hours imposed by a landlord. 

Considering the Cons

1. Properties listed for sale are not always in the best locations. You are more likely to find a property for lease on a busier street. With more traffic (drive-by and pedestrian), your business may be more likely to thrive if you choose to lease.  
2. If you’re vacating an existing leased location to move into a nearby purchased unit, you may be leaving a great opportunity for a competitor to move into your old location.
3. With ownership, you will become responsible for your own repairs. You can either complete these yourself or hire an outside professional to handle the necessary work (for example, you may not be familiar with the workings of a Heating, Ventilation and Air Conditioning (HVAC) unit, and will benefit by bringing in outside help).
4. A recession could result in your purchased property losing value. 

We recall negotiating a lease renewal for a tenant with a fairly large space in a small strip plaza. In fact, this tenant occupied about half of the entire plaza. Even though the landlord did not want to sell this property, The Lease Coach negotiated a First Right to Purchase Option for our client. Going one step further, we also negotiated the purchase price at the current market value at that time, even though the purchase option would not likely be used for about five years. As of today, this building has doubled in value; however, the tenant can purchase it for the lesser price we originally negotiated for. It will be a nice profit on paper.

What you choose to do is, ultimately, your decision; however, steer clear of purchasing commercial property just to say that you have done so. Having worked with business owners since 1993, we have seen many horror stories from both commercial tenants and commercial property owners. Only purchase a property for your business if you would lease it anyway.