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What Dictates Commercial Rent Prices?

Updated: Apr 7

As a rule, buying makes more sense if you have enough money to put down and six months of mortgage payments with no financial hardship for your company.

Purchasing might be a good option if you:

· We want to lease some of the premises to generate secondary income.

· Plan to raise equity on the property.

On the other hand, leasing might be the correct answer if you like:

· The ability to relocate upon completion of the lease.

· To keep from withholding your money.

· No more tax deductions on rental charges.

· Freedom of responsibility for the maintenance of the property, by your lease.

· To operate in an area that costs too much to buy.

If you are interested in buying commercial properties, you should consider a loan secured by the Small Business Administration (SBA) as a first option.

The commercial property retains its value over time if it's well maintained—it's a long-term asset. Here are some pros and cons of purchasing a business property.

Pros of Buying:

· Building Fairness: If you pay all the cash, you own 100% of the property right now. If you take out a mortgage, your down payment and monthly payments increase the home's net worth. If you refinance or sell the property, your principal is the difference between the fair market value of the property and the remainder of the loan, and this helps establish the overall value of your business.

· Asset appreciation: Being the owner of a commercial property allows you to take advantage of the capital appreciation, that is, the increase in the value of your property over time. The rate of appreciation varies depending upon the rate of inflation, local supply and demand, interest rates, and other factors.

· Rental income: A business that purchases commercial real estate generally occupies at least 51 percent. That's because lenders categorize real estate as an investment asset when the ownership share is 50%. or less—a factor that makes it more difficult to be eligible for the loan. If you have the remaining space, you can rent it to renters and create a secondary source of revenue. For example, if you purchase a small building, you can rent the ground floor to a retailer, restaurant, travel agent, or other company.

· Tax advantages: You can deduct interest and amortization from your commercial property as tax relief.

· Control: When you own a property, you have control over it (within the limits of zoning limitations), which means you don't have to bargain with an owner if you want to reconfigure the space.

You will also make fixed monthly mortgage payments, instead of a rent payment that may be amended upon the expiry of a lease.

Cons of Buying:

· Initial Expenses: Usually, you must make a down payment of 10% to 40% of the value of the property and you must also pay the closing costs and the assembly and evaluation costs. For instance, on a $1 million property, you can expect to pay between $100,000 and $400,000 for a down payment and other expenses.

· Difficulty in obtaining funding: You may have difficulty obtaining a commercial home loan at a reasonable interest rate if you or your business cannot obtain bank financing. While the best commercial real estate loans may have interest rates of less than 4%, loans made by hard money lenders may have rates of 10% or more. In that case, the rental can be more profitable.

· Prepayment Penalties: Many commercial mortgages have high prepayment charges or other penalties unique to commercial real estate in the form of maintaining performance or defeating if you repay the loan balance.

· Passive: You are liable if a person is injured on your property. This means that you will be required to pay a liability insurance policy to protect yourself against prosecution. If you lease some of the property, you are subject to the property manager's responsibility, which will require additional insurance and asset maintenance. In addition, many loans may require a personal guarantee, making you personally responsible for repaying the loan if your company can't.

· Loss of liquidity or capital: It is still possible that the value of your property decreases, and you could incur a capital loss if you decide to sell, which is a disadvantage. In addition, you could also have liquidity problems because your money would be tied up in the property. To get your money back, you should be selling or partially refinancing. Furthermore, the money tied up in the property could have been used for other purposes if you had leased it.

Advantages and disadvantages of renting business properties.

Commercial leases are usually between five and ten years in duration. You may use the property for the duration of the lease, subject to the restrictions in the lease contract.

Pros of Leasing:

· More cash: You're tying up much less money because you don't have to make a down payment to move into space. However, you should expect to pay an initial fee for a lawyer, broker, pre-screening, and security deposit.

· Fixed monthly cost: When renting, you will generally not have to pay for important maintenance, repairs, or maintenance of the property, even if you may be called upon to pay for minor repairs. Instead, you will know exactly what you must pay each month without the worry of unforeseen and costly repair costs.

· Tax breaks: You can deduct these costs as incurred: rental payments, real estate insurance, property taxes (according to the type of lease), utilities and maintenance. You can deduct the full amount of your rental payment, unlike deducting interest only from a mortgage.

· More flexibility: Qualifying for a lease is often easier than qualifying for a commercial real estate loan, so there are more options when it comes to choosing a spot. Alternatively, you may move when the lease expires without having to sell the property. You might be able to rent a too costly property to buy, which can help you access a prime or strategic location.

Cons of Leasing

· No equity or appreciation: You do not accumulate net worth when renting, even though some contracts have a business leasing feature that allows you to apply some of the rent you have already paid for the purchase of the property. Without equity, you don't get the added value of capital.

· No passive income: You are not the owner and therefore cannot collect rent from other people, losing a secondary income that you could earn by owning a property.

· Rent is expensive: Your monthly rental payments will generally be more than the mortgage payments on the same property. The typical triple-net tenancy contract makes renters liable for monthly retail insurance, property taxes, utilities, and maintenance costs. In addition to paying the lease, you have higher costs, although the after-tax costs depend on the situation.

· No control: The lease may contain restrictions and even early cancellation clauses that limit the lessee's ability to control the rental space. You have no control over rent increases after the lease expires, and if you go bankrupt, you still must pay the rent or face penalties.

When you are considering whether to buy or lease, it's a good idea to speak to a knowledgeable business and commercial real estate broker to address your specific needs. A real estate broker in your area will be able to help you parse out the important information so you can make the best decision for your small business.

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