Lease or Buy Commercial Real Estate, that is the question
With every decision in life, it’s easy to stick to what’s familiar or to follow conventional wisdom as if one size always fits all. But important decisions, such as whether to lease or buy commercial real estate, requires a higher level of discernment. Which option is best for you? The answer might surprise you.
1. Start with a timeline.
How long do you plan to stay in your new commercial real estate location? This is often the single most important deciding factor in determining whether it is wiser to lease or buy commercial real estate. If there is a significant chance that you will relocate within 3-5 years, leasing is virtually always the best choice. Any equity gained in such a short time period on a purchase would likely be wiped out by the taxes and fees associated with a purchase and sale. A lease will also put you in a better position to get up and move on your own terms and timetable without having to wait for a buyer to take your place. Planning on sticking around longer than 5 years? Read on…
2. Research the Market
The age-old adage of “buy low, sell high” is the key to wealth for many savvy investors. Get in touch with a real estate expert that you trust and get their perspective on the real estate market. The last thing you want to do is to buy a property only to have its value collapse while you’re holding the mortgage.
3. What’s your number?
Before putting money into the investment when deciding whether you should lease or buy commercial real estate, it’s important to understand your cash flow. Take a look at your budget and figure out what kind of a monthly payment you are comfortable with. In addition to this, look at your financials to determine how much money you will have available to put down on a purchase if that ends up being your best route.
4. Do you qualify?
Talk with your commercial lender to find out what type of loan, interest rate, and term they can offer you. If you don’t have the cash and you don’t qualify for a loan, then your decision is made for you. If you do qualify, stick to the lesser of your own pre-determined budget or the amount the bank will allow you to spend to determine what you can actually afford.
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5. When Deciding if you should lease or buy commercial real estate, compare the numbers side-by-side
Using the monthly payment and down payment amounts you’re comfortable with, do a side-by-side analysis. To find out your monthly payment on a purchase, use an online mortgage calculator, plugging in the numbers given by your lender. To find out your monthly payment on a lease, research comparable leases in your area. A trusted real estate broker can also do this for you.
6. Factor in Equity
If you have money available for a down payment and you plan to stay put for a while, chances are good that buying will be your best option. Typically, but not always, monthly payments are less for the buyer than they are for the renter. On top of these savings, your equity will begin to snowball during the length of your occupancy, building long-term wealth for you or your business. Consult your real estate broker or financial planner for an analysis of how these numbers could look for you over the next 5, 10, 15 years. You may also want to consider whether a new or existing entity, other than your business, should own the real estate.
7. Go Get It
Once you have a plan, execute it well. Take advantage of your real estate broker’s expertise to find you the best fit and the best deal. Be clear about your end goal so that your broker can negotiate terms that help you meet your business goals. Whether you decide to lease or buy commercial real estate, enjoy your new business home!
Deciding whether to lease or buy commercial real estate can be a challenging decision. You will likely be best served by coordinating a great team of professionals around you. These pros may include a commercial real estate broker, a commercial real estate attorney, a CPA, a contractor, an architect, and many more groups that can help you navigate these sometimes difficult waters.
If you would like a free initial consultation, be sure to reach out to Lighthouse Commercial Real Estate today!