Real estate analysis get complicated often times. Getting stuck between choosing to lease or buy real estate is a common dilemma that investors come across in their lives. However, making a choice between leasing or buying a property is not the same as dealing with a similar confusion in context with any equipment or device. There are several factors like company financials, the economics of each of the two options, the value of the property, and so on, that determine the profitability of the decision in the long term.
If you are facing a similar confusion, here is a detailed guide to help you decide whether to lease or buy a property while doing real estate analysis. The guide will tell you about everything that you need to know about leasing and buying a property like factors to consider, benefits, and how to decide between the two.
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Benefits of leasing in real estate analysis
There are mainly three benefits of leasing in real estate analysis that may be extremely important to the companies.
- The maintenance of the real estate is mostly taken care of by the lessor, so you don’t have to invest money in renovating the property.
- Leasing real estate can help companies obtain liquidity if they need it.
- In companies, leasing can impose some resources on the organization which may or may not be needed by the companies in the later stage of business.
Benefits of buying in real estate analysis
Buying can be extremely beneficial for your company if you are buying the property for investment purposes. Here are some of the striking benefits of buying that can largely influence your decision for buying or renting a property.
- Buying is a cheaper option if your company is based in one place and plans to stay in the same place for a long time.
- Buying costs for a property don’t fluctuate highly whereas rent prices keep increasing every year.
- It is a great way for making long-term investments as prices of property increase marginally over a long period of time.
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When should you buy?
Here are some situations that are favorable for deciding of buying the property rather than leasing during a real estate analysis.
- Personalization of the property
When you wish to make significant changes in the property like changing your business hours, making renovations or upgrades in the property, or wanting full control of the property, buying comes around as a better option in real estate analysis.
- Long term expenditure
In the long term, buying becomes a cheaper option than leasing if we consider the costs of repairing and maintaining the property in addition to the costs of the real estate. It is because when you are leasing the property, the landlord is extracting all these costs and profits for themselves from the tenant. So, leasing becomes expensive when compared to buying if you must stay in that place for many years.
- The success of your business
If your business is booming (mostly retail and services), then you wouldn’t want to lose hold of your company location just because the landlord decides to end the leasing agreement or wants to put the property to a different use. In such cases, buying becomes the best option for businesses to avoid these unpleasant scenarios and costs of relocation.
- The value of the property is appreciating
Sometimes you may not find a property that is up for lease in areas where the property rates are quickly increasing. In such times, it is extremely profitable to buy the property because it will act as a greatly beneficial investment for your business while simultaneously providing you with the desired space to set up your company.
When should you lease?
After looking at the scenarios where buying should be your go-to option in real estate analysis, let’s look at some situations where leasing is a better option for your business.
- Limited cash flow
If you have a budding business, your income may not allow you to spend a big chunk of money in buying during your real estate analysis. Also, if you still decide to buy the property on finance, you may not be able to pay the installments because of limited cash flow during the initial few years of doing business. So, leasing becomes a preferred option in this case.
- To avoid maintenance duties
Some lease agreements may put the burden of fulfilling maintenance duties of the property on the resident. These maintenance duties may include making structure repairs, maintenance of the inbuilt electric and heating equipment, and so on. So, if you wish to avoid all this hassle and additional costs, leasing is the better option to go with.
- The mobility of the business
If your business requires you to change places frequently, leasing is the best option as you wouldn’t want to go through all the purchase agreement formalities over and again. Also, it cuts off the additional effort of finding a suitable profitable buyer for your property again and again.
- Poor credit rating of the business
If you don’t have a fair credit rating of the business, you may not be able to buy the property on the mortgage. In such cases, leasing is an ideal option to go with, as the lessors do not check any credit scores before making lease agreements.
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Things to consider while deciding to lease vs buy real estate analysis
While choosing between leasing and buying in real estate analysis, it is important to consider the following factors to rule out the best solution according to your company requirements.
- The time of your requirement
The time of your requirement for the property plays a significant role in determining whether to lease or buy a property. If your business is meant to stay in one place for a very long time, it is better to buy the property rather than lease it. It is because the rents of the property will keep increasing every year.
As a result, you may end up spending too much amount on paying the rents in your real estate analysis of the property. On the other hand, if you keep changing places, leasing the property is better as there is no point in buying a property for a few months and facing the hassle of finding a profitable deal while selling it.
- Feasibility according to your budget
It is important to consider your budget while choosing from the leasing vs buying options in real estate analysis. If your budget is low, leasing should be the preferred option as it is less expensive as compared to buying. In this step, you must read through the lease agreement to make sure that the agreement expires at a time when you no longer need the property and hence, you won’t need to overpay.
- Need for customization of the property
If your business needs to make specific changes to the property, leasing may not be the feasible option. This is because most leasing agreements don’t allow the tenants of the property to make infrastructural changes in the property. You can, however, talk to the landlord for the inclusion of a Tenant Improvement Allowance in the lease agreement. This provision lets the tenants make minor changes in the property to adjust it for their requirements. But it is still recommended to read all rules and regulations given in the lease agreement before moving on to customizing the property.
- The income statement of your business
If you are a new company trying to base your foundation in a particular place, leasing can be a better option for you as buying the property will need plenty of money. In leasing the property, you must look through the income statement of your business to know whether your company’s income will support the lease payments of the property or not. In addition to this, make sure to count the increments in the rent that are added every year and additional costs of maintenance of the property.
Choosing between leasing and buying a property in real estate analysis can be a daunting task. But if you consider all the factors mentioned above and carefully weigh the pros and cons of each option, it is very easy and profitable for your company to make the right decision. In addition, make sure to consider all the terms and conditions of the leasing and buying agreements to find the best solution for you.
You might also like to explore below external contents on real estate analysis:
- How To Conduct Real Estate Analysis and Why it is Important?
- Understanding Four Phases of Real Estate Cycle
- Buying vs Leasing Commercial Real Estate: Pros and Cons of Each
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