Should You Buy or Lease a Commercial Building?

When my clients approach me to help find and secure a commercial building, they’re actually asking for much more. Buying or leasing your commercial space is only one tiny facet of your journey as a business owner or area manager. The reality extends far beyond mortgages and leases, and the decision to buy or lease your space could impact your life in many different ways.

Commercial real estate is about so much more than owning or renting out a stake of land. It is all about you and your visions for the future. Most importantly, it’s about your relationships with your vendors, customers, and your community.

As your go-to commercial real estate expert, I can help you craft and fine-tune your vision while advising you on the ins and outs of acquiring the perfect spot to set up shop. But where I really shine is in forming and nurturing professional and personal relationships. My goal is to help you make decisions today that will benefit your business, and your life, for years to come.

So here’s the scoop on buying vs. leasing a commercial building:

What’s Your Business Personality?

Your decision to buy or lease a commercial property depends on a variety of factors, one of which is your own personality and risk aversion. I’ve worked with companies of all sizes, but they all had one thing in common: there were people behind the names.

If you’re a control freak with big dreams and you like to be in the driver’s seat, buying might seem like the right choice. If you’re more of the flexible type who can roll with the punches, a lease might be better.

However, there’s a lot more to the question than assessing your personality. Let’s dive deeper.

Thinking of starting or growing your business in Pensacola? Check out the posts below:

The Case for Buying

Buying real estate is more than owning the property and therefore being able to do with it as you please–although that is a nice benefit! It’s more about the value of that real estate becoming a part of your investment portfolio in the long-term. I have known doctors and accountants who have built a nest egg worth millions of dollars through their Real Estate holdings.

If you buy your commercial property, the equity you build is almost like another stream of revenue. You are making money from the goods and services you provide, but you’re also building wealth as you create more equity on the property. And in the booming greater Pensacola market, the value of real estate almost always goes up.

Owning your property means you have far more freedom to renovate and mold the unit to your needs than when you need a landlord’s approval for everything. If you’re a take-charge person who wants to make your own decisions, buying offers the advantage of control.

The Value of Equity

I mentioned building equity in the section above, but it’s truly one of the most compelling reasons to buy commercial property. In fact, building equity through commercial real estate can help you grow your wealth in some ways you might not expect:

Owning real estate helps create a more diverse investment portfolio. Every year, you can assess your assets and re-allocate funds based on your ever-changing goals. Giving you more power and more freedom to increase your net worth.

Every time your land grows in value, you gain more equity and purchasing power to refinance and re-invest in your business or in more income producing Real Estate. At a certain point, you have the flexibility to sell the building or sell your business, or branch off into different investments.

All of this aside, remember that equity is a tool you can use to reach your goals. It’s not the be-all and end-all. The more you grow, the more options you have.

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The Downsides of Buying Commercial Real Estate

There are a lot of upsides to owning a commercial property, but it isn’t all gravy. Like any real estate purchase, buying involves a significant commitment and more than a little risk. The barrier to entry is much higher because to buy a commercial property, you need to have the capacity to borrow money and the capital available for the initial investment.

Another downside of owning a property is that – while you are in control – you are also responsible for any repairs and maintenance that come up. If a customer comes in and floods the bathroom, it’s on you to fix. (However, that becomes less of an issue when you have close relationships with contractors and tradespeople in the community. When you’re well connected, one phone call gets the problem resolved.)

For some, buying may simply not be on the table if you’ve exceeded your capacity to borrow money. At this point, you either have to grow – or you lease. Impeccable credit may not be essential to succeed as an entrepreneur, but it definitely helps in this regard.

Counseling clients on how to improve, develop, or rebuild their credit is one of the many services I provide. With my long standing relationships with all of the lenders in town, I can make those invaluable introductions for you.

In fact, one of my first questions to you will be, “Who is your banker?” That individual needs to be at the top of your list of contacts. (If you don’t have one, I will make sure that you get one.)

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The Ups and Downs of Leasing a Commercial Space

The obvious advantage of leasing your space is that it requires much less of an initial financial commitment. This makes the barrier to entry less formidable for new entrepreneurs who are still in the trial-and-error phase.

Once the lease expires, you are free to move on to a different location (either bigger or smaller or even a different geographical area) or even cash out of your company altogether. Leasing means fewer repair costs and headaches since the landlord is in charge of maintaining the building.

If that same customer floods the bathroom, you call the landlord to fix it. You don’t need to lose sleep over any unforeseen big expenditures, which leaves you to focus on growing your business.

I won’t get deep into the tax implications of leasing. I’m the commercial real estate guy, not a tax expert. However, I can tell you that there are operational advantages in that you can likely write off your rental costs as an expense, on your taxes. When you own the land / building and it gains in value, it becomes income, which could mean more taxes to pay on that added income..

The question is, “Do you need the expense more than you need equity?” If you want to know more about that, I can connect you with a financial advisor.

Leasing instead of buying can also allow you to get into the market and expand by investing your capital into your company rather than the Real Estate. You have more flexibility and cash flow if you want to launch and grow exponentially.

Eventually, if you don’t like where you are, you can put your notice to the landlord and leave. Although depending on your lease you may need to pay a penalty, it could be easier than listing your property for sale!

The Cons of Leasing

The disadvantages of renting a commercial space are similar to those of renting an apartment, only magnified. Despite having a Lease, you are somewhat at the mercy of the landlord. Does he take care of his building, and make repairs quick enough, or use high quality service providers and products?

In some situations, they might even decide not to continue your tenancy after your lease expires, leaving you scrambling to find a suitable new location. Something entrepreneurs can overlook is lease extensions. You and your landlord will both be fighting for favorable terms. A fixed increase is more likely in your best interest, but chances are your landlord will push for market-based increases. With us, we will fight for you to have the most options that can benefit you.

Imagine what will happen then if a Wal-Mart moves in across the street from your shop. The value of your unit will likely skyrocket. If you owned, that would work to your benefit, but not when you lease. If the property grows in value, so could your rent when it comes time to renew. Or, your Landlord could sell the building to a new owner who is less attentive to the space.

By leasing, you can grow your wealth through the value of your company, but will not benefit from the passive wealth that real estate can provide. Your business idea itself might be worth millions, but your eggs are all in that basket. And keep in mind, if you sign a five-year lease but go out of business in year one, you’re still on the hook for those rental payments.

Final Considerations

Unlike buying a house, emotions cannot cloud your decisions in commercial real estate. It’s a business investment, and that means thorough research and analysis is necessary at every stage.

Everything might look right on paper, but fail the acid test in the real world. Conversely, your whole vision might be a reach for others, but a phone call to the right person makes it work for you. In many ways, it’s who you know and who you can connect with that gets your ideas off the ground.

No matter what, your first step is to talk with a real estate professional (like me) with extensive knowledge in the commercial sector. We’ll take a look at your goals, work to find the right spot, and begin nurturing valuable relationships within the local community. Together, we can assess your situation and determine a course of action that aligns with your vision.

With The Zimmern Team, our focus will be on you. We’ve never had a piece of Real Estate sign a contract or a Lease, it’s always a person. That’s why to us, its about the people first, and then the best Real Estate decisions will follow. Our strength is representing you for the best outcome tailored to meet your goals.

Do you have questions about the many incredible commercial opportunities in Florida real estate? Our Florida Panhandle real estate agents are standing by. Reach out to me directly at danny@thezimmernteam.com or call 850-232-1944 to connect with us today.