Whether you’re a business looking to find space or an investor looking to build cash flow from real estate investments, commercial real estate is always an intriguing option. But many of the advantages of commercial real estate also serve as downsides if you’re not careful.
Depending on your situation, the pros might outweigh the cons—or vice versa. Here are some things to consider:
Pros of Buying or Leasing Commercial Real Estate
Acquiring commercial real estate—whether you’re a business or an investor looking to earn money—can be a powerful way to build wealth. Consider the advantages:
- A company can generate rental income from its own property. When a company occupies at least 51% of a commercial building, that building can still generate rental revenue without technically being considered a rental property.
- Dedicated space. Whether you buy or lease the real estate, it’s hard to put a dollar value on the space you have dedicated to business. For self-employed entrepreneurs who start a business from home, making the leap to commercial real estate can feel like more than just an investment in their own productivity. It can feel like the first step toward legitimacy.
- Consistency. Locking in a commercial real estate purchase or even a lease agreement means that even though you’ll have the expenses associated with commercial real estate, they’ll tend to be fixed expenses. For example, if you lease real estate, you’ll outsource some of the expenses to the property manager—such as cosmetic updates and repairs.
- Strong demand. Owning commercial real estate is a great thing when unemployment is low and there’s plenty of demand for space. According to Capital One, both consumer spending and strong employment numbers have led to consistent demand in the commercial real estate space, giving another avenue for investors who are looking to diversify their portfolio.
- Variable commitments. If you get to choose between buying or leasing real estate, you can pick the one that’s best for your current outlook. If your company needs to generate another source of income to increase cash flow, purchasing commercial real estate for both space and rental income can be a shrewd move. For those who want a simple, straightforward approach to their office space, a lease may be ideal.
Cons of Buying or Leasing Commercial Real Estate
- Expenses. There’s no way around this basic issue: If you buy or lease commercial real estate, it’s going to cost you. That means you’ll have to be confident that not only is this the right decision, but that any investment you make is a strong one. That requires a lot of due diligence in finding the right space.
- Commitment. Although we listed “variable commitment” as a positive above, keep in mind that any purchase of commercial real estate is generally going to be a major commitment, especially since commercial real estate can be so large. If your business signs a lease, for example, it’s a commitment to that amount of space. You have to know what your business needs and what it can afford well ahead of signing on the dotted line.
- Lack of equity (in certain circumstances). If you buy, this isn’t a problem. But if you lease, you’re putting a lot of money out there without building any equity. While this is a justified expense, one of the reasons that it might be better to buy when you can is that you can build equity—an asset that your business can use.
- Income questions. If you lease a commercial space, then it’s easy—you won’t get any income from it. But remember that you’re not guaranteed cash flow if you buy commercial property, either. You have to make a well-placed investment to secure cash flow. You have to have tenants. You have to have low expenses, and preferably outsource things to a property manager that also doesn’t cost too much. Income is always great when you can secure it, because it’s passive, but it’s not guaranteed.
Deciding What to Do With Commercial Real Estate
When you have investment options like commercial real estate, it can go one of two ways. But here are some signs that you may want to buy or lease commercial real estate for your business:
- Your current space is too small and you need room to expand.
- You have excess money and you’re not sure how to reinvest it.
- You have long-term plans to build equity in assets beyond immediate business assets.
If you can find the right property, these are great signs that commercial real estate is right for you. But take the time to consider the positives and negatives for your situation before you apply for a loan or start searching for properties.