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Buy or Lease? « CGC Commercial
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Buy or Lease?

by Chris Garcia, 9:52 AM on May 6th, 2011, No Comments

The age old question, should you buy or should you lease your real estate? The answer to this changes constantly. My answer of late has been you should look strongly into owning real estate. The general reason for this is that rental rates have dropped, but not at the same rate as purchase prices. In some instances you can find sale prices that are 50% of what they were originally listed at. It would be extremely tough to find a lease listing that would drop their list price by 50%. Also, most sellers are looking to unload one property versus most Landlords lease many different assets and can balance out that one vacancy with an entire portfolio of property. In addition, they would rather wait to lease a building and get a higher rate rather than lock in a below market rate for years. That hurts the value of their property.

With purchase prices dropping and sellers becoming more motivated it is a great buying opportunity. Recently, with more than one client we have found that the monthly mortgage was far less than the cost to rent. Consider the following scenario on a 40,000 SF industrial building:

Tenant leases 40,000 SF @ $4.50 per square foot (5,000 SF office)- the annual payment would be $15,000 per month. Assuming taxes/cam remain a constant we’ll focus on just the rent payment vs the mortgage payment.

Tenant buys 40,000 SF industrial building for $40 psf and adds another $10 psf which brings the price to $2M ($50 psf x 40K SF). That would look like this:

  • SBA Loan at 10% down equals $200,000
  • Mortgage of $1.8M
  • 6.5% interest rate over 300 months

The payment would be $12,153 per month. That is with $200,000 down but that money goes towards equity in the property.

This means that you would pay less per month and have an ownership stake in the property if you were to buy. For an industrial property, $40 psf is a legitimate number, as a matter of fact we recently represented a company that bought a building that was very close to the above scenario.

Now there are many factors to consider when weighing the options. Those include company growth, cash position, exist strategy in the real estate, financing capabilities, and more. However if you are able to purchase and the mortgage is less than the rental payment it is something that should be explored.

CGC Commercial is a Wayzata based commercial real estate company that specializes on helping Tenants with their real estate. We are constantly touring the market and searching for the best deals for sale and lease.

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