Chris Carmen / November 9, 2018
When counseling business owners and managers on leasing office space and industrial property in Indianapolis over the past 25 years, since founding CARMEN Commercial Real Estate, one of the most common questions I’ve been asked is: “Does it make sense to buy a building instead of leasing my real estate?” On the surface, the answer to this question may seem obvious. The cost of a mortgage payment will often be less than a rental payment for comparable buildings. Further, by purchasing, the owner of a business can build equity in a real estate asset, whereas, no matter how many rental payments a business pays for real estate, they will never build equity. However, the answer is not nearly as clear-cut as it may seem.
There are many variables that should be weighed to accurately consider the cost of owning real estate. Some of these variables include the cost of real estate taxes, property insurance, utilities, and the cost to maintain the property, such as maintaining the heating and cooling and all other building systems, landscaping and snow removal, etc. Depending upon the type of lease, such as full-service gross or modified gross leases, many of these costs are included in lease payments, which of course closes the apparent gap between a mortgage payment and a rental payment.
Further, business owners should consider the intangible costs associated with buying real estate to operate their business. These intangibles could include the human resources needed for operating the real estate. Unless the business is large enough to dedicate an employee(s) to operate the real estate, staff members will need to take some their focus away from the business’ core mission of selling widgets or providing its service to customers. And then there are the financial tradeoffs to consider. How does taking on real estate debt impact the business’ ability to borrow to operate and grow the business? Will the business lose money if it is forced to see the real estate in the short-term, perhaps within five years of the purchase?
As mentioned, there are many variables that can and should be considered before buying real estate in lieu of leasing real estate. And each case is different, depending on every business’ own set of unique circumstances. I can’t stress enough, don’t embark on this exercise on your own. Consult your advisors, financial, legal and of course, your real estate advisor. If you have any questions regarding this information or would like to sit down to discuss how the Lease vs. Purchase question applies to your business, please reach out to me.
Sincerely,
Chris Carmen, President
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