What is better – buying or renting commercial real estate?

If you own a small business, you're likely to run into this conundrum: Buy or rent out your commercial property? Before making a decision, it's important to find out if this has financial implications for your company, as well as weigh the pros and cons. Here's what you need to know about buying (or renting) commercial real estate.

What should be the reasons for buying commercial real estate?

There are several reasons why you should consider buying commercial real estate. Buying can be a good fit for your business if you have full control of the property, which means you don't have to report to the landlord. This gives you the opportunity to build capital and long-term wealth, and you'll also probably be able to buy a property with a 10% down payment using a loan from the Small Business Administration (if you run a small business).

Buying commercial real estate means that you have a property to lean on, or you can rent out the property to tenants in case your business fails, you close, or just want to sell. Finally, it can also help you take advantage of some tax benefits, although of course it's important to consult your accountant first.

Pros and cons of buying

On the plus side, you will have the opportunity to increase the stake in the property as it is likely to rise in value over the long term, making it a good investment vehicle for you. You can also benefit financially from renting out your commercial property to a tenant, which will give you an additional stream of income to pay your mortgage and other expenses. Meanwhile, owning a property means you'll have fewer restrictions on remodeling, retrofitting, and decorating the space.

On the other hand, buying commercial real estate also has some drawbacks. You will be responsible for the maintenance of the property, which will require you to invest your own time and money in the building. You will also have to pay property taxes and you may face financial pitfalls such as losing money if the building drops in value, you have to sell it or you will not be able to find a buyer.

Reasons to think about renting commercial real estate

There are many reasons to consider renting a commercial property and understand if it makes sense for your business – for example, whether your company is expanding and you are not sure if you will outgrow that property. You should also consider whether market conditions are volatile, and if entering into shorter-term leases — such as three to five years — makes you more comfortable than an excessive commitment.

Renting can also make sense if you don't have the funds to make a down payment, such as if you're still in the early stages of setting up your company. In scenarios where you need a building immediately – for example, within the next 30-60 days – renting a property can be a great option, and it should also be preferred during periods when the terms of the lease are more favorable than the purchase.

Pros and cons of leasing

One of the pros of renting is that it offers you a lot of flexibility, meaning you're not tied to a specific location, a certain area, or a monthly payment longer than the lease term. This means that you only need minimal property maintenance and you can set up your company in a location you could otherwise afford.

Renting can often allow you to share the cost of a building with other companies if your business is running part-time, and your proximity to other businesses can give you the opportunity to build invaluable relationships.

The disadvantages of renting a commercial property include the fact that you're not investing in the property, if you're a tenant, rents are likely to go up over time, and you'll also have to deal with a landlord.

Is buying office space a good investment?

Whether buying office space is a good investment will depend on what makes financial sense for your business. After all, commercial real estate is a long-term asset and will retain its value over time if properly cared for. First, if you pay everything in cash, you will immediately become the owner of 100% of the property. Your down payment and monthly payments will create capital in the property if you take out a loan. On the other hand, your net worth will represent the difference between the remaining loan amount and the fair market value of the property and will help in creating the total value of your company if you sell or refinance the property.

The fact that commercial real estate is a rising asset can also make buying office space a good investment as it allows you to benefit from capital gains, i.e. an increase in the value of the property in the long run. The rate of inflation, local supply and demand conditions, and interest rates, among other factors, affect the rate of appreciation. Rental income and potential tax breaks can also help make buying office space a good investment for you.