Pros and Cons of Leasing Commercial Real Estate
Commercial leases typically run from five to 10 years. You can use the property during the lease, subject to any restrictions built into the lease agreement.
Pros of leasing commercial property Cons of leasing commercial property
Access to more liquidity No equity or benefits from appreciation
Fixed monthly cost Unable to collect passive
Tax breaks for property expenses High rent expenses
Flexibility to leave the property No control of the space
Pros of Leasing
More liquidity: You tie up significantly less of your cash because you don’t need to make a down payment to move into the space. However, you should expect to pay
upfront fees for an attorney, broker, prelease inspection and security deposit.
Fixed monthly cost: When leasing, you generally won’t have to pay for any significant maintenance, repairs or upkeep to the property, though you may be expected to
pay for minor repairs. Instead, you’ll know exactly what you need to pay each month without the worry of unanticipated, expensive repair costs.
Tax breaks: You may deduct these costs as incurred: Lease payments, property insurance, property taxes (depending on the lease type), utilities and maintenance. You
can deduct your entire lease payment, in contrast to a mortgage’s interest-only deduction.
Qualifying for a lease is oftentimes easier than qualifying for a commercial real estate loan
, so you have more options when it comes to picking a space. You can also move when the
lease is up without having to sell the property. You might be able to afford to lease a property that is too expensive to buy, which can help you get into a prime or strategic location.
Cons of Leasing
No equity or appreciation: You don’t accumulate any equity when you lease, although some contracts have a lease-to-own commercial property feature that allows you
to apply a portion of the rent you’ve already paid toward the purchase of the property. Without equity, you don’t benefit from capital appreciation.
No passive income: You aren’t the landlord and thus cannot collect rent from others, losing secondary income you could gain from owning property.
Rent is expensive: Your monthly rent payments will usually exceed mortgage payments on the same property. The typical triple-net lease agreement makes tenants responsible
for monthly retail insurance, property taxes, utilities and maintenance costs. When added to the lease payment, your costs are greater, although after-tax costs depend on the situation.
No control: The lease may have restrictions and even early termination clauses that hamstring the tenant’s ability to control the rental space. You have no control
over rent hikes when the lease expires, and if you go out of business, you must continue paying rent or face penalties.