WHICH IS BETTER FOR YOU: OWNING OR RENTING COMMERCIAL PROPERTY?

If you regularly make significant decisions. One of these decisions can be whether you'll buy or rent your commercial property. We've compiled the benefits and drawbacks of buying and renting commercial real estate to help you decide if one is right for you.

If you regularly make significant decisions. One of these decisions can be whether you'll buy or rent your commercial property. We've compiled the benefits and drawbacks of buying and renting commercial real estate to help you decide if one is right for you.

Advantages of Owning a Commercial Property

·        Gaining equity:

 If you pay in full cash, the property is immediately yours in its entirety. If you take out a loan, your down payment and regular payments increase the property's equity. Your equity, which adds to the overall value of your company, is the sum of the fair market value of the property minus the outstanding loan debt, if you refinance or sell it.

·        Asset that increases in value:

 Owning commercial real estate entitles you to the advantages of capital appreciation, or the rise in the value of your asset over time. The pace of appreciation varies depending on a number of variables, including interest rates, local supply and demand dynamics, and inflation rates.

·        Rental income:

A business that purchases commercial real estate typically occupies at least 51% of it. This is due to the fact that lenders define real estate as an investment property when the ownership portion is 50% or less, which makes it more difficult to meet loan qualification requirements. If you have extra space, you might wish to rent it out to tenants to bring in some extra money. If you purchase a tiny structure, for instance, you might rent out the ground floor to a retailer, restaurant, travel agency, or another company.

·        Tax breaks:

You are entitled to a tax deduction for interest and depreciation on your commercial property.

·        Control:

When you own property, you have control over it (within the bounds of zoning regulations), thus you can reorganize the space without having to work with a landlord. In addition, you will pay a fixed monthly mortgage payment rather than a variable rent payment that changes when a lease expires.

Disadvantages of Owning a Commercial Property

·        Upfront spending:

Typically, you’d have to make a down payment of 10% to 40% of the property’s value, and you’ll also have to pay for closing costs and origination and appraisal fees. For example, on a $1 million property, you can expect to pay anywhere from $100,000 to $400,000 out of pocket for the down payment and other fees.

·        Prepayment penalties:

If you prepay the loan balance on many commercial real estate loans, you may be subject to steep prepayment penalties, such as yield maintenance or defeasance costs.

·        Liabilities:

You are liable if someone is injured on your property, so you should purchase liability insurance to shield yourself from legal action. You are liable for property management responsibility if you rent out a portion of the property, which necessitates additional insurance and care of the property.

·        Loss of capital or liquidity:

An issue is that there is always a potential that your property's value will decrease and that if you choose to sell, you might suffer a capital loss. Additionally, because your money would be invested in the property, you can experience problems with liquidity.

Advantages of Renting a Commercial Property

·        More liquidity:

Since there is no down payment required to move into the space, you lock up substantially less of your capital. However, you should prepare to pay up front costs for a security deposit, an attorney, a broker, and a pre-release inspection.

·        Fixed monthly cost:

While small repairs may be expected of you, you won't typically be responsible for major maintenance, repairs, or upkeep of the property when renting. Instead, you won't have to stress over unexpectedly high repair bills because you'll know exactly how much you need to pay each month.

·        Tax benefits:

Lease payments, property insurance, property taxes (depending on the type of lease), utilities, and maintenance are all expenses that can be written off as they are incurred. In contrast to a mortgage's interest-only deduction, your whole lease payment is deductible.

Disadvantages of Renting a Commercial Property

·        No equity or appreciation:

 When you lease, you don't build up any equity, however some leases provide a lease-to-own option for commercial real estate that lets you put some of the rent you've previously paid toward the purchase of the property. You cannot gain from capital growth if you lack equity.

·        Rent is pricey:

On the same home, your mortgage payment will often be higher each month than your rent. Tenants are often responsible for paying monthly retail insurance, real estate taxes, utilities, and maintenance fees under a triple-net lease arrangement. Your costs are higher as compared to the lease payment, yet after-tax costs can vary.

·        No passive income:

Since you aren't the landlord, you are unable to collect rent from tenants, forfeiting any potential secondary income from property ownership.

·        Lack of control:

The lease could contain limitations and even early termination clauses that limit the tenant's capacity to manage the rented space. When the lease ends, rent increases are out of your hands, and if your business closes, you are still obligated to pay rent or suffer penalties.