For many people who start a business, it can begin in a home office, a garage, or a general living space in the beginning. For most businesses starting out, there isn’t a need for commercial property. Soon, many businesses will outgrow the original location, and it’s time to start considering utilizing a commercial real estate property.
Commercial real estate is a property exclusively used for businesses to manage their business and produce an income. It can be a simple office space, storefront, warehouse, or more, as long as it is used for income-generating activities.
When it’s time to scale up your business, you have to start making critical decisions to grow your business and increase your revenue effectively. There are pros and cons to both leasing or buying a commercial real estate property in Vancouver, and you have to be able to weigh your options before you settle on a decision. Here is some essential information on both options to help you choose.
What is the Difference Between Leasing and Buying?
Before deciding whether you should lease or buy, it’s essential to understand the differences. When you purchase a commercial property, as a business owner, you own the property and do not have to answer to a landlord or follow strict rules or guidelines. You can freely make changes to the structure or design of the space to customize it to your needs. After you pay off the loan, you own it outright.
When you lease a property, you enter into an agreement or contract with the owner or landlord, and you rent the space for an agreed amount of time. You will pay the owner to use the property for your business, either short-term or long-term.
Buying a Commercial Property
There are many advantages to buying a commercial property, and while you might think it’s similar to buying a home, investing in commercial real estate has some key differences. Here are some of the pros and cons of buying commercial real estate.
The Advantages of Buying Commercial Property
Build Equity – If you choose to purchase your property with cash, you own the building free and clear, and the equity exists in its value. If you take out a loan, you can build your equity as your make payments towards the principal of the purchase. The more payments you make, the more equity you have.
Appreciation – Your property value can increase over time. The value varies with interest rate fluctuations and local supply in demand.
Control – When you own your commercial property, you have complete control and autonomy to do what you need to reconfigure and redesign the space to fit your business needs. Your mortgage payment is a fixed amount that will not fluctuate over time.
Tax Breaks – You can take advantage of tax deductions for owning your property and deduct interest and depreciation of your property as a tax break.
Potential Rental Income – Depending on the size of the space, you could rent part of it out to other tenants and become a passive income.
The Disadvantages of Buying Commercial Property
Upfront Costs – Like purchasing a home, there are upfront costs for buying a commercial property. Many loans will require anywhere from 10% to 40% down of the property’s value and any closing costs and appraisal fees.
Qualifications are Challenging – It could be challenging to qualify for a commercial real estate loan if your business cannot get approved for financing. You want to be sure to have a reasonable interest rate before you agree to loan terms.
Loss of Capital – There is always a risk the commercial property will decline, and you might take a loss if you decide to sell. There could potentially be liquidity issues if all of your money is tied up in your property.
Leasing Commercial Property
Leasing a property is similar to renting a home or apartment on a larger scale. Here are the pros and cons to consider when deciding if leasing the property is right for you.
The Advantages of Leasing Commercial Property
Minimal Upfront Costs – Less of your money is tied up in the property when you lease as you do not typically have to make a down payment. There are some fees to be expected when leasing a large space, such as inspection fees, security deposits, and potentially a lawyer or broker to sort out the paperwork.
Easier to Qualify – You may qualify easier for a commercial property than if you were to purchase. This option allows you more flexibility in the location.
Fixed Costs – You generally are only paying the monthly lease rental fee when you lease. If maintenance is needed, that is handled by the owner, reducing costly maintenance. There are some repairs that you may be expected to pay.
Tax Breaks – You can write off your lease payments, maintenance costs, utilities, and insurance when you lease your commercial property.
The Disadvantage of Leasing Commercial Property
Rent Can Cost More – One of the major drawbacks of leasing space is that monthly payments are typically more than owning the space.
No Control – When you lease a space, you have little to no control over the costs associated with rent or maintenance, and it can increase regularly depending on your contracts. Additionally, you have to operate with strict requirements with little to no flexibility.
No Appreciation or Equity – There is no equity or appreciation to benefit from when you lease a place.
Should You Buy or Lease Commercial Real Estate?
Choosing between leasing or buying in Vancouver, BC, boils down to the needs of your business and your financial state. It makes more sense to purchase a property if you have the cash to put down and have an attractive interest rate offer. It also may be beneficial to rent part of the space to offset some of the costs. Overall, buying is a great option when you want more flexibility and as an investment to build equity.
Leasing could be the better option if you do not have a large sum of money to put down upfront. It could be beneficial if you want the flexibility to move out of the space if you intend to scale your business or you don’t want the burden of keeping up on maintenance.