Which is a Better Option - Buy or Lease a Commercial Property?

  • @kw
  • 08 Apr 2021

There are few important factors to decide whether one should go for leasing or purchasing a property. If you purchase a commercial property, you basic need is to earn regular income from it. The benefit of purchasing is however will require substantial initial investment but you save on rental outgoing every month. Your purchasing decision depends upon your available fund, growth prospects of the location to gain quick capital appreciation and if you an investor and want to earn rental income then you need to assess your overall gains i.e., ROI (return on investment). If you are new in business then it is expected that instead of blocking a large chunk of money, you would like to go for a safer option and gain experience over a period of time. There are many pros and cons in both the options and one should take a judicious decision to get the best returns considering all parameters.

Option-1: Purchasing a Commercial Property

1. Ownership: If you purchase a commercial property, you are in complete possession of the property. You are free to undertake renovations as per the building rules and you don’t have to seek any permission from any individual. Further, you are free to do any legal business, keep flexible timing for yourself. You are completely in control of your property. There is no question of vacating the space unless you decide to do so at your own will.

2. Avoid long term monetary outgo: As an owner of the commercial property, there is no monthly outgo as rent. Depending upon the location you may instead earn a regular rental income by leasing out your property at market rate which increases over a period of time. A retail shop can benefit due to its measured and controlled outflows.

3. Mortgage the commercial property in need: A purchased property can be mortgaged or used as a collateral to provide security with banks and financial institution in case of need and the money can be made available for your business needs. Normally banks and financial institutions allow 70% of the property value of the market rate. You will be able to repay the loan received by mortgaging your property through EMIs.

4. Availability: Purchase properties are easily available compared to leased property. Some builders prefer to outright sell the constructed area for getting immediate funds. It is the investor who leases out their purchased property and the builder only facilitates the process.

5. Capital appreciations: If you purchase a property in a location where land prices are increasing. The value of your commercial property increases proportionately. Buying a commercial property in such location makes more sense. You gain more when the commercial property is in construction stage and prices are not high. Capital appreciation for such property can be very high depending upon the growth in that area.

6. Tax benefits: Purchase of commercial property can reduce you tax burden, especially if you avail loan for the purchase. You gain tax exemptions on the interest that you pay against the loan that you take.

Option- 2: Leasing of Commercial Property 

1. Controlled cash flow outgoing: Leasing requires much less cash outflow as you pay only rental. This is suitable for those who re new in business and do not what to block their money in buying a commercial space. In case of leasing your outgoing would be only a negotiated deposit money and monthly rental. You can utilize your cash in keeping stocks if it is for a retail shop.

2. Maintenance charges: In most of the cases the maintenance of the property is the responsibility of the landlord. Expenses on account of maintenance are lower in case of lease. All expenses for maintain the structural soundness of the building, apart from day to day repairs are on property owner (landlord).

3. Flexibility of shifting your location: A leased commercial space has much more flexibility. If you wish to shift out from the existing location to some other suitable location, you will have complete freedom, provided there is no restriction in your lease terms.

4. Credit ratings: In case of leasing you do not have the obligation to maintain credit rating by CIBIL. If you take loan from a bank or financial institution to purchase, your CIBIL will be checked. Leasing does not require CIBIL rating.

5. Depreciating property prices: Leasing does not get effected by depreciating property prices. In such case sometime the rental value may decrease in revised terms of lease. 

6. Loan against stock hypothecation: Bank / financial institution allow cash credit limits against stock hypothecation for running the business in a leased property.

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