Leasing vs. Owning Commercial Space

by Stephanie Faris on February 22, 2013
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Many people think of McDonald’s as merely a fast-food chain, but the company actually owns some of the best real estate in the country. McDonald’s realized early on that the biggest money wasn’t in selling hamburgers; it was in buying up choice properties. The company then built a restaurant on each site and leased it to a franchisee, who ran the eatery and paid rent to the corporate office. This model remains intact today.

Of course, many small-business owners can only afford to lease retail or office space when they’re just starting out — and that rent often consumes a large part of their monthly budget. However, money isn’t the only reason to choose renting over owning.

To determine whether leasing or buying would work better for you, consider three big advantages of each:

Leasing

  1. No down payment is required. You typically need a down payment to buy property, which can take a huge chunk out of your startup budget or cash reserves. By leasing, you can invest that capital in growing your business — and keep the option of buying open for later, when your finances are stable.
  2. Repairs are handled by property management. When you lease space, if the air conditioner breaks (as it eventually will), all you’ll have to do is call the property manager and wait for someone to show up and fix it. If you own that same space, you’ll be forking over thousands of dollars on repairs every time something major fails.
  3. You have short-term options. As your business expands, it may grow out of its space. By signing a lease of one to five years, you’ll have the option to move to a new spot as your needs change. Leasing also gives you the opportunity to try out an area of town to determine whether it’s a convenient location for your clients and staff.

Owning

  1. Property is an investment. As McDonald’s learned, real estate is an investment that pays off over time. Granted, property values have been on the decline in recent years. But that means you may be able to buy low now and see the value appreciate over the next few years. In fact, given the low interest rates and prices of late, it’s never been a better time to buy commercial real estate, Forbes asserts.
  2. You can save money. Although a down payment can tax your budget, buying a property gives you the option of refinancing and eventually paying off the mortgage balance (after which there’s no monthly payment). Because rents are subject to increase over time, owning can be better than leasing in the long run.
  3. You are your own landlord. When you own a space, you have control over what you do to it. If you want to paint the walls purple or update the windows and doors, you can — without needing anyone else’s permission. This freedom can come in handy as your business evolves.
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