Are you in the market to invest in commercial real estate (CRE) in San Francisco? It’s an enticing investment class because commercial properties have been known to deliver consistent returns and promise massive growth, not to mention they’re also a great source of passive income when successful.
That said, not all CREs are created equal, and you have the option to rent or buy the property of your choosing, depending on what’s better for your situation.
But how exactly do you know whether buying or renting CRE is the option to take?
Let me help you examine the pros and cons of both methods so you can make a well-informed decision.
Pros and cons of buying
PROS OF BUYING
- Capital appreciation. Although rent from tenants is the main source of returns for most CREs, many investors turn a good profit when they decide to sell because commercial property tends to dramatically appreciate in value over time.
- Tax breaks. CRE ownership can result in favorable tax deductions relating to mortgage interests, property taxes, depreciation, and more. Make sure to discuss the tax breaks available to you with a commercial real estate agent or accountant before making the decision to buy.
- Total control of the property. As the property owner, you’ll have direct control of your investment, from the property’s aesthetics, to choosing the kind of businesses you want to lease to. As long as you adhere to zoning restrictions and local regulations, you have the freedom to customize your property as needed.
CONS OF BUYING
- Large down payment. CREs often require you to make a sizable down payment, sometimes as much as 40%. There are also other fees to worry about, such as due diligence fees, closing costs, and the like. This puts the upfront costs of CRE investing out of range for most investors.
- Capital loss. If your business tanks, your property’s value could decline and you could be forced to sell off your property at a loss.
Pros and cons of renting
PROS OF RENTING
- Lower upfront spending. You don’t need to make a hefty down payment when you rent, which allows you more liquidity.
- Fewer responsibilities. Owning CRE means you are responsible for maintenance, insurance, liabilities, and the like. Since you’re only renting, such issues are the landowner’s problem, and you get to focus solely on growing your business.
- Easier financing qualifications. It’s often easier to qualify for a lease than a CRE loan. You’ll also have more flexibility, as renting often allows you to afford occupying a certain class of commercial property that would otherwise be too expensive to buy.
CONS OF RENTING
- No equity or appreciation. You can’t build equity when you lease, and consequently, you won’t benefit from the property’s capital appreciation.
- Limited control. As a renter, you’ll have to adhere to the rules and regulations set by the landlord. You’ll also have no control over rent hikes when you renew your lease contract. And if your business closes down, you’ll still need to keep paying rent until the end of your contract, or you could face legal ramifications.
Not sure which is better for your situation? Let me, Amir Hardy, assist you in making the right decision. I am a commercial real estate agent with plenty of experience in the Pacific Heights real estate, Noe Valley real estate, and Glen Park real estate markets in California. Call me today at 415.602.0570 and let’s discuss your next move.