Tips to Determine Whether to Lease or Buy Commercial Real Estate
In many instances, the buy or lease decision can be as simple and arbitrary as “I want to buy a property and have my business rent it from me,” with little more thought given, or a purely financial analysis driven decision that accounts for factors like:
Weighted cost of capital
Anticipated occupancy period
Net present value of the lease alternative
Net present value of the purchase alternative
Internal rate of return of the cash flows
Projected sales prices, and more
Those are all valid and worthy of due consideration – but you shouldn’t stop there. Here’s what else needs to be reviewed.
Local Market The market where you wish to locate has a significant impact on your decision. Here in northern Nevada, locating any buildings for sale is a challenge, let alone finding a decent selection. Obviously this tends to drive prices up. Conversely, for-lease options tend to be plentiful and competitively priced. I’m sure other markets have vastly different options and even submarket areas within metro regions can offer different options. It’s important to understand this before you start to formulate your plan, as it could prompt you to consider alternative market areas for your business.
Best Practice: Partner with an experienced agent – he’ll quickly bring you up to speed with clear facts about your market and its opportunities and risks for you.
Future Potential Long-term planning is also an area of consideration that often gets overlooked. What is going to be going on in ten years with your business model, business location, rents, property values, the uses for the type of building you will occupy, the way your industry operates, etc.? We frequently work with building owners and tenants who are trying to back out of a property they are involved with that is no longer working for them. Many of these problems could have been avoided with improved long-term planning at the inception of the process.
Best Practice: If you’re unsure of which questions to ask yourself to paint a potential picture of the future, ask an agent.
Goals The most overlooked category comes down to goals. Ask yourself, “What do I want out of this transaction? What’s best for me and best for my business future?” You’ll be surprised how enlightening it can be to clarify these questions before moving forward.
Best Practice: Get the best, most experienced and highly qualified real estate professional involved with your planning as early as possible. Don’t settle for anyone who can’t demonstrate certified financial analysis skills and the experience to advise you wisely.