Riverside is an ever growing market and the potential for success looms throughout this beautiful city of ours. As you look for the right place for your business, your main focus will probably be “location, location, location.” While proximity to your customers and employees will be a priority, there are other factors just as important. When your company decides it is time to search for commercial space, it can sometimes be difficult to decide between leasing and buying.
Each option has a list of pros and cons but the option that is best for your company is largely dependent on your company’s needs and expectations for the future. Over the long term, buying commercial real estate is typically more cost-effective. That said, each leasing also has its advantages and potential drawbacks that you will need to consider with respect to your financial and operational needs.
We at Stance CRE like to arm our clients with as much information as possible before they make their commercial real estate decisions. We know this city well and can guide you through the process from start to finish. So whether you need office, retail or warehouse space, we have compiled an overview of pros and cons of both leasing and buying your commercial space to aid you in the decision-making process.
Buying Commercial Real Estate
Buying commercial real estate gives you dependability and control. That is why investing in a commercial property is often advised for established companies looking to meet future, as well as current, space requirements.
However, the decision to invest in real estate comes with larger upfront costs, as well as additional legal, regulatory, and maintenance responsibilities. Carefully consider your business’s immediate and long-term goals.
Purchasing can help you to:
- Potentially realize investment/capital gains as the property value appreciates
- Avoid exposure to rising rental costs
- Take advantage of tax deductions for commercial mortgage interest and annual depreciation
- Tailor the property to your needs without landlord limitations
- Sublet the property or some of its units for additional business income
- Have more control over how the property is used
Pros of Buying
Building Equity: The good news is that, for the most part, property values appreciate. The longer you remain a property owner, the more money you make. If you decide to lease part of your property to other businesses, you can revise your lease terms and increase rents according to the lease agreement you have with the tenants. You can also decide to sell the building later and earn a profit to buy a new one at a better location.
Appreciating Asset: Owning commercial real estate allows you to benefit from capital appreciation — the increase in your property’s value over time. The rate of appreciation varies with the inflation rate, local supply and demand conditions, interest rates and other factors.
Rental Income: You can start earning rental income immediately when you become a commercial building owner. If you are not using all the space available, you can rent it out to other business owners and make extra income from the monthly rent payments.
Tax Breaks: You can deduct interest and depreciation on your commercial property as a tax break.
Control: When you own property, you have control over it (within the confines of zoning restrictions), which means you don’t have to negotiate with a landlord if you want to reconfigure the space. You’ll also make fixed monthly mortgage payments, instead of a rent payment that can be changed whenever a lease expires.
Cons of Buying
Upfront Spending: If you are buying an office or commercial building, you need first to make a down payment. Just like auto loans, these down payments usually range from 15%-30% of the building’s entire purchase price, especially if you want a loan to finance it. This money can be a lot for a small or growing business, making it almost impossible to own if your margins are thin. for owner-users they may qualify for an SBA loan and only need to put down 10%. For investment users, the down payment is typically closer to the 20%-35% range. If this applies to you, it is in your best interest to look into an SBA loan. These generally only require 10% of the purchase price as a down payment.
Liabilities: You are responsible if someone is hurt on your property, which means you’ll have to pay for a liability insurance policy to protect yourself from lawsuits. If you rent out part of the property, you are subject to property manager liability, which will require additional insurance and property upkeep. Furthermore, many loans may require a personal guarantee, which makes you personally liable to repay the loan if your business cannot.
Loss of Liquidity or Capital: You may be forced to use business capital to make a down payment for the building. Most business owners will take out a loan to finance the purchase. However, you may stretch yourself too much to meet these debt obligations, and this can impact your available credit when you go to purchase future items.
Leasing Commercial Real Estate
Commercial leases typically run from five to 10 years. You can use the property during the lease, subject to any restrictions built into the lease agreement. When there is low inventory, such as the market we are currently in, it can be challenging to find the perfect building to buy so leasing can be a good alternative for the short term.
Leasing can help you to:
- Avoid tying up capital in a major asset, and keep lines of credit open
- Fully deduct your business’s lease payments as a business expense
- Expand and reduce the scale of your operations as necessary
- Remove the common risks associated with property ownership
- Relocate to a space that is a better fit (or better price) at the end of the lease term
Pros of Leasing
More Liquidity: Your business does not have to make a huge down payment when leasing. As a tenant, you only need to pay the agreed-upon rent and a refundable security deposit, and then move in. The monthly payments leave you with disposable income for business operations.
Tax Breaks: You may deduct these costs as incurred: Lease payments, property insurance, property taxes (depending on the lease type), utilities and maintenance. You can deduct your entire lease payment, in contrast to a mortgage’s interest-only deduction.
More Flexibility: Qualifying for a lease is typically easier than qualifying for a commercial real estate loan, so your options are greater in terms of choosing a space. You can also move when the lease is up without having to sell the property. You might be able to afford to lease a property that is too expensive to buy, which can help you get into a prime or strategic location.
Cons of Leasing
No Equity or Appreciation: You still will not qualify as an owner after many years of paying the monthly rent and renewing the lease agreement. Even if you pay as much money as the price of the building, you will move out one day and leave it behind along with your entire investment.
No Passive Income: You are not the landlord and thus cannot collect rent from others, losing secondary income you could gain from owning property.
Higher Monthly Payments: In the long run, rent payments are costly. You will find that in 10 or 20 years’ time, you have paid enough rent to own that building – but it still belongs to another person. In addition, at the end of the lease term, you will pay the wear and tear charges from your security rent deposit. Also, early termination is very costly and can eat into your profits.
No Control: The lease may have restrictions and even early termination clauses that hamstring the tenant’s ability to control the rental space. You have no control over rent hikes when the lease expires, and if you go out of business, you must continue paying rent or face penalties.
How Stance Commercial Real Estate Can Help You
Navigating the commercial real estate market can be an intimidating task, especially in a fast-moving market such as the Inland Empire. Any commercial real estate situation can change in the blink of an eye, leaving you to face challenges that you never anticipated. And to make a sale that meets your pricing and timeline goals, there are even more factors to keep in mind.
Stance CRE can be a great resource regardless of which type of business owner you are. We have been adding value to business owners’ decisions right here in Riverside for years. We are not just market experts, we are your neighbors! We are a local business with local interests.
At Stance Commercial Real Estate, we live and breathe Riverside culture. We are not only working in the community, we live here… we love it and we want to help you succeed in it!
Call us today at (909) 772-1212 and let us help you decide which type of role is best for you!