🏢 Lease vs Buy: The True Cost Breakdown Every Business Owner Should Know 💰
🏢 Lease vs Buy: The True Cost Breakdown Every Business Owner Should Know 💰
📊 Lease vs Buy Commercial Real Estate: What the Numbers Really Say 🧮
Lease vs Buy: The True Cost Breakdown
When business owners evaluate space needs, the first question is often simple: Should I lease or buy?
The better question is: What does each option actually cost over time?
In commercial real estate, the lease-versus-buy decision directly impacts cash flow, tax strategy, balance sheets, long-term equity, and exit options. Below is a practical, numbers-driven breakdown to help investors and owner-users make informed decisions.
The True Cost of Leasing Commercial Space
Leasing offers flexibility and lower upfront capital requirements, but it comes with long-term financial tradeoffs.
Common Lease Costs Include:
·Base rent (often escalating annually)
·Triple Net (NNN) expenses: taxes, insurance, CAM
·Tenant improvement (TI) contributions or out-of-pocket buildout
·Rent escalations (2–4% annually is common)
·Renewal risk and re-tenanting disruption
Hidden Cost Reality:
Rent is a 100% expense with no equity creation. Over a 10–15 year period, tenants often pay more in rent than the purchase price of the building itself—without owning anything at the end.
The True Cost of Buying Commercial Property
Ownership requires more planning but creates long-term financial leverage.
Ownership Costs Include:
·Down payment (often 10–20% with SBA or owner-user financing)
·Debt service (principal + interest)
·Property taxes, insurance, maintenance
·Capital expenditures (roof, HVAC, parking lot)
Ownership Advantages:
·Equity build-up with each payment
·Tax benefits (depreciation, interest deductions)
·Rent replacement with fixed debt (hedging inflation)
·Appreciation and exit flexibility
·Ability to lease excess space for income
Key Insight:
Many owner-users discover their monthly ownership cost is comparable—or lower—than leasing, especially with SBA 504 or 7(a) financing.
Cash Flow Comparison: Lease vs Buy (Simplified Example)
Metric
Lease
Buy
Monthly Payment
$9,500 (rent + NNN)
$9,200 (debt + expenses)
Annual Increases
Yes
No (fixed-rate loan)
Equity Created
$0
Yes
Tax Advantages
Limited
Significant
Exit Value
None
Asset resale
When Leasing Makes Sense
·Short-term occupancy (under 5 years)
·Rapid growth or contraction expected
·Capital preservation is critical
·Uncertain location strategy
When Buying Makes Sense
·Stable or growing business
·Long-term occupancy (7–10+ years)
·Desire to control costs
·Strategic wealth-building mindset
The Bottom Line
Leasing may feel easier today—but ownership often wins financially over time.
The right decision depends on time horizon, capital structure, tax strategy, and business stability.
If you are paying rent now, you are already servicing someone else’s mortgage. The question is whether it makes sense to start servicing your own.
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© 2023-2024 Bill Rapp, Broker Associate, eXp Commercial Viking Enterprise Team
