Commercial Real Estate News / Leasing/Renting / Renting Commercial Property vs. Buying: Making the Right Decision

Renting Commercial Property vs. Buying: Making the Right Decision

Published: 11-15-23 Category: Leasing/Renting

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A street-side view of commercial property.

As a business owner, your company's future growth likely lives rent-free in your head. But with all this talk about office space woes, what part does your business's commercial property play in furthering that growth?

That question inevitably begs another: Should you buy commercial property to house your business operations or find commercial property for rent? The question of buying versus renting is an important one that requires time and research to answer.

We know: That's a lot of questions. But that's why we're here to help. In this quick guide, we'll discuss the pros and cons of buying vs renting commercial real estate as well as the factors that should influence your decision.

Let's get started.

Understanding the Pros and Cons of Commercial Property for Rent

The primary advantages of finding commercial real estate for rent are business flexibility, mobility, and lower risk.

#1 – Flexibility

When you lease office space or rent retail space, you won't be tied down to a tangible asset. Renters don't have to worry about property management, and it's easier to break a lease than to sell a piece of property.

#2 – Lower Upfront Costs

Renting typically has lower upfront costs: You won't have to worry about down payments, loan servicing fees, closing costs, etc.

#3 – Fewer Financial Responsibilities

Depending on the type of lease (i.e., gross or net lease), landlords might handle most repair and maintenance work.

#4 – Amenities & Concessions

Renters can often negotiate lease concessions, like rent abatement or tenant improvement allowances.

Disadvantages of Renting Commercial Property

The main pitfalls of finding commercial property for rent are restricted property control and the lack of a tangible business asset.

#1 – Less Control

Renters have limited control over the property they're using and typically must seek landlord approval before making any modifications.

#2 – Rising Costs

Part of lease renegotiation for commercial property might include regular rent increases. Commercial property mortgages can often have static interest rates and fixed costs.

#3 – No Equity

Renters won't build equity in the property, so they can't leverage it as a financial asset and reap investment returns as a result.

Exploring the Benefits of Buying a Commercial Property

The key benefits of buying a commercial property are property control and the advantages of owning a real property business asset, such as tax benefits and financial collateral/leverage.

#1 – Asset Appreciation

Commercial property is a business asset that appreciates in value. Businesses can leverage their commercial real estate assets, as a result, for financing or sell the property if they need cash.

#2 – Control

When you own commercial property, you have complete control over the space. You can change the floor layout, add extra rooms, and make updates and upgrades as you see fit without getting permission from an owner.

#3 – Tax Benefits

Commercial real estate investors can take several tax deductions on operating expenses, property depreciation, mortgage interest, and more.

#4 – A Tangible Business Asset

Business owners can make extra income from their commercial real estate by leasing and subleasing the property to tenants.

Disadvantages of Buying Commercial Property

The major downsides, however, to buying commercial property are the commitment and risk.

#1 – Upfront Costs and Commitment

Buying property has a much higher upfront cost than renting between down payments, servicing fees, agent fees, and closing costs.

#2 – Maintenance Responsibilities

Building owners also typically handle the bulk of maintenance and management responsibilities.

#3 – Less Flexibility

Buying commercial property is not a weekend task. Buying a property can take months of planning, during which your business's financial situation can change.

#4 – Market Risk

Property markets change every day, and a commercial real estate investment can lose value. Losing value, therefore, makes it harder to sell property and get it off your hands.

Factors to Consider When Making the Decision

The decision to buy or rent is not something you should take lightly, so consider carefully the following factors.

#1 – Growth Plan

Like with any investment, start with budgeting. Most commercial lenders will require somewhere around a 25% down payment, which is higher than typical down payments for residential real estate.

Even if your cash flow and business financials are positive, you might not have liquid capital to cover the initial down payments when it comes time to purchase, so budget carefully.

#2 – Budget

What are the near-future plans for your business? Are you still focusing on rapid growth, or do you have a slower, steadier plan?

The lower commitment to renting is a positive for younger businesses that need to remain flexible and mobile while they grow and establish a consistent market presence.

#3 – Market Conditions

Surrounding market conditions should also have an impact on your system. General falling property value trends, for example, could be a reason to rent instead of buy.

#4 – Business Needs

What kind of needs does your business have? Do you need a permanent space to set down roots and grow, or do you need a temporary space that you can vacate when necessary?

#5 – Asset ROI

The potential return on any commercial real estate investment also matters. For example, say you've found a retail space and are deciding whether to buy it or rent it.

Monthly mortgage payments might be more than monthly rent, but asset appreciation and building equity could make the overall ROI of the purchase worth the higher upfront cost.

Case Studies and Examples

According to one case study from Mazirow Commercial, Inc., one tenant managed to secure a $45,000 annual rental discount thanks to smart lease renegotiation.

The company smartly assessed its financial situation and ended up saving a significant amount of money.

Making the Right Decision for Your Business

The key to making the right decision is understanding your business priorities. The main tradeoff between renting and buying comes down to flexibility versus control. You also need contingency plans in case the state of the market changes.

If you're a first-time renter or buyer, we highly recommend working with a real estate broker. Aside from providing general advice about commercial real estate, brokers can help you find the right properties and gather the appropriate documentation.

Due Diligence Always Pays Off

Deciding between buying and renting your commercial property is one of the most important decisions you'll end up making for your business. Whether you're looking for a garage to rent or want to buy out an entire office complex, due diligence is key.

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