The Great Real Estate Debate: Lease vs. Buy
“Should I lease or buy?”
After more than two decades working in commercial real estate, this is still the most common question I come across. A business needs space and the owner is curious—should I become a tenant or a landlord?
There is no one-size-fits-all when it comes to commercial real estate. The answer to whether or not a business should lease or buy is that it depends. There’s a lot of analysis that goes on before I’m able to recommend to a client that they lease or buy; in fact, it’s probably similar to the analysis you did before deciding whether to lease or buy your car, or your home.
If you’re trying to decide between leasing or buying commercial real estate, check out the case for each below along with real-life examples from business owners just like you.
The Case for Leasing
The benefits of leasing commercial real estate:
Not responsible for building maintenance
Allows for flexibility (can move easily)
Less hassle as building managed by someone else
The choice of whether to lease or buy is really dependent on what’s most important to your business. The benefits of leasing are a hands-off real estate experience that leaves the administration and management of the building to someone else—but you’re paying for the convenience. For some businesses, the hassles of owning and managing a commercial property far outweigh the premium paid to lease space from someone else, but for other businesses, it makes more sense to buy and take on those responsibilities themselves.
Retail Ready Foods
After 10 years leasing the same 2,500 sq. ft. space, the president of Retail Ready Foods wondered if it would be wise to use cash the business had accumulated to purchase its own commercial space.
In making his decision, the president considered the following:
the cost of the building and the cost to finance the purchase;
the amount of investment required to make improvements to the building so that it would satisfy Retail Ready Foods’ needs;
and whether or not the space would continue to be functional should the business grow or contract.
From a financial perspective, it turned out to be better for Retail Ready Foods to stay in their current location and continue leasing as this would generate a far better return on equity if the cash was invested back into the business rather than into a new commercial space. Additionally, by continuing to lease, the president could simply find new space should the business continue to grow or start contracting, whereas ownership would leave Retail Ready Foods confined to a certain space with no flexibility.
In the end, leasing turned out to be the best choice for Retail Ready Foods.
The Case for Buying
The benefits of buying commercial real estate:
If there is extra space, it can be rented out for added income
Not restricted to what is allowed by the landlord
Able to maintain space exactly as you want
Choosing to buy rather than lease commercial space offers many of the same benefits as buying your home. Instead of a landlord, you’re paying rent to yourself and it will typically cost a lot less than leasing; however, keep in mind that building maintenance is now your responsibility. Instead of writing a cheque, you’ll need to hire cleaners, put in a security system, ensure the fire alarms are working, etc. Your rent costs are lower but your responsibilities are greater.
One of the more popular reasons for owning vs. leasing is the ability to collect rental income. A business will purchase a commercial space with far more space than needed and rent out the additional space to other businesses. In theory, this seems like a great idea; however, in practice, when most business owners discover exactly what is required of a landlord, it’s often concluded leasing commercial real estate isn’t a business they want to be in.
Another consideration of the lease vs. buy debate is that as your own landlord, you’ll have to cover costs previously covered by your landlord including moving or tenant improvement costs. When leasing, landlords often cover moving costs for new tenants and allow them to pay for improvements to the space over the course of their term through a Tenant Improvement Allowance; all of which you will need to pay for if you are your own landlord.
If your business involves significant investment in machinery or has a ‘dirty’ use that may not be appealing to most landlords, then there is a case that owning your premises is a better option than leasing as the landlord may impose certain restrictions for the use of the space that aren’t conducive to effectively running your business.
Metford Design Consultants
For 10 years, Metford Design Consultants has leased office space in the Toronto airport area. Owner Aggie Metford had seen her small business grow rapidly over the last several years and was concerned her current space wouldn’t be able to keep pace as her business continued to grow. There was also the added inconvenience that her office was a 40-minute commute from her home.
Metford considered the following:
cost of the building;
current interest rates;
investment required;
whether or not additional space could be rented out;
future prospects of her company;
and, of course, the benefits of a shortened commute/
After carefully considering the capital required and other ways that capital could be invested, Metford decided she could own and maintain a building for less than she was paying to lease at her current spot and was content with the added responsibilities of building ownership. In addition, she found a building less than 10 minutes from her home, which would all but eliminate her commute.
For Metford Design Consultants, purchasing commercial real estate was better for the business than leasing.
The Final Word on Lease vs. Buy
The decision of whether to lease or buy comes down entirely to your particular situation including business needs, other available investment vehicles, and future prospects. If you feel that owning commercial property would be beneficial for your business, contact MCRE today and have a qualified professional help you review your options.