Should you buy or lease a commercial property?

[ecis2016.org] There are many advantages to leasing or even purchasing a commercial property. We look at five factors that businesses should consider in each case, before deciding which option to take

If you are planning to shift from your existing property and start business operations in a new one, you may be confronted with the dilemma of whether to buy or lease the new property. The projected growth, income and legal requirements of your business, should be looked at, while taking this decision. Purchasing a property, will help one to save on the rental outgo over a period of time and also benefit from any increase in property prices but the initial monetary requirement will be much more, as compared to leasing a unit.

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Advantages of purchasing a commercial property

1. Control over the property: Having control over the property may be necessary, especially if you plan on making significant renovations. Purchasing the property can also help, vis-à-vis having flexible business hours or if you want to conduct your business in a very different way than how you were doing it initially.

2. Long-term monetary outgo: The total monetary outgo in the form of rentals that you need to pay over many years, may end up being more than what you would pay to buy a property. If you are in a business, such as a retail store, where the location of the property is important, then, purchasing may be a better option, because the future rent increases by the landlord may force you to move out of the property.

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3. No suitable property available for lease: There can be a situation, where there are no properties on lease that suit your requirements. Buying a property can be the only alternative, then.

4. Increasing land value: If you want to move to a location where land prices are increasing and property prices are going up, then, buying makes more sense. Property prices may increase due to improving physical and social infrastructure in the area, or improving demographics. Whatever the reason, it would be better if you spot such trends early, when the prices are not high already. If you purchase a property in such an area, you can benefit from any increase in property value, apart from saving on rental outgo.

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5. Tax savings: A purchase deal can also lower your tax outgo. While the rent you pay may not be deductible, the money you spend on purchase, can attract tax deductions. If you take a loan for the purchase of the property, deductions are also available for the interest paid on EMIs. This can result in significant savings.

Advantages of leasing a commercial property

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1. Cash flow: From a purely cash flow standpoint, a lease is better than a purchase. If you are somewhat new in business and the revenue stream of the business is just building up, then, leasing is a better option. In case of rental, you initial outgo will be limited to the security deposit and first month’s rent. In case of a purchase, you initial outgo will be the whole of the price of the property, or at least, the down payment for a loan, which is usually quite high.

2. Maintenance of the property: In many cases, the onus of maintenance of the property is on the landlord. If you do not want to take care of periodic maintenance and just want to concentrate on your core business, then, leasing may be a better option. Expenses related to maintenance are lower, in case of a lease. If you purchase the property, there can be significant expenses on maintaining the structural soundness of the building, apart from day-to-day to repairs.

3. Retaining flexibility: You may want to retain flexibility and not be tied down to a single location for a long time. Leasing gives you far more mobility than outright purchase. Moving to a new location by selling the purchased commercial property, may not be a very good option, especially if property prices are appreciating.

4. Your business’ rating cannot support a loan: The credit rating of your company may or may not be able to secure a loan for purchasing a property, or the interest rate can be very high if the rating is somewhat inferior. If you have faced some financial difficulty or upheaval in your company recently, banks may not be willing to extend a loan to you. However, such a situation does not stop you from taking a property on rent.

5. Declining property prices in the locality: There are localities that may be witnessing declining property values. If you find a property that suits the requirement of your business in such a locality, it is advisable to lease the property, rather than purchase property in such a location.

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Category: Lifestyle