Leasing vs Buying a Property: Which is Better for You?
October 29, 2019
What are the key differences in leasing and buying a property?
- Up-front costs
- Recurring costs
There are different ways to acquire and secure a property. The two main options a person has is to buy it straight up or to lease it.
You might think that buying is always the best option when it comes to commercial spaces or houses for sale in Metro Manila, but that is simply not the case. There are advantages and disadvantages involved when you compare buying versus leasing a property.
Here are the main differences between leasing and buying a property.
For both leasing and buying, ownership of the property is possible, albeit through different means. If you are buying a property or any other product or commodity, the asset will belong to you and you alone once you complete the full payment.
Meanwhile, in a lease agreement, you are making an agreement with the owner, or the ‘lessor’, that you can use their property for a specified fixed period, usually “long-term” or at least six months.
This process is not the same as renting. In rent agreements, the landlord is free to change the details of your deal. This is not possible with lease agreements. Rents are also short-term (ie. days or weeks at a time) in nature and can in no way lead to possible ownership by the tenant.
This leads us to the next feature of leasing: an option to buy. Lease with an option to purchase/buy is the more formal term for this kind of contract, and, just as the name states, once the lease period ends, the lessee has an option to buy. In lease contracts, there is usually a stipulation stating that the Lessee shall have the right of first refusal (ie. Lessee will be given the priority to buy the property before offering it to anyone else) should the owner decide to sell the property.
Buying has more up-front costs due to the nature of the payment terms. Lump-sum means paying for something in full — meaning the whole purchase price plus taxes are required up-front.
If you’re purchasing something like a commercial or residential property, then that would require a hefty amount of money. For these kinds of investments, an installment plan may be the more preferable way of payment so you can manage your funds better, especially if you have several existing financial obligations already. The up-front cost involved with an installment plan is usually the down payment (which is by no means a small amount) along with taxes and other miscellaneous fees involved if any. This usually varies with different developers/sellers.
Leasing has no large up-front cost which is why it is often preferred by people who want to remain financially liquid. The usual requirement of any residential lessor would just be the standard two months security deposit and two months advance rental up-front. However, this does not necessarily mean that leasing is automatically the cheaper and better option. Your monthly lease could end up higher than monthly mortgage payments in some areas and at the end of your lease period, the ownership of the property will remain to be the lessor’s.
There are also recurring costs involved when you buy a property. The term that is mostly used here is ‘upkeep’.
Buying a commercial property still involves recurring costs even if you pay for your property via a lump sum. You will be responsible for annual real property taxes, insurance, repairs, maintenance, and all the other costs involved with owning such an asset.
You don’t have to worry about the aforementioned recurring costs when you are leasing a property because that responsibility still falls on the lessor. You only have to think about your monthly utility bills.
Leasing is much more flexible, not just financially, but also in terms of life planning. You’re not locked into a mortgage or a property that you may or may not be making use of in the long term future. The option to buy will always be there when the time is right.
When you finally make the decision to buy a property, it’s a process that usually takes time and one that cannot be rushed. Because of this, some would opt to lease first as they take time to find the ideal property for them.
There are advantages and disadvantages that come with both methods of securing a property. Analyze your financial situation as well as your medium to long-term life and business plan to know which one suits you best.
Whether you’re looking to buy a house for sale in Metro Manila or commercial space in the central business district, the same rules apply.
If you have a considerable amount of funds and are looking to settle down for the long-term or take your company to the next level, then owning the property is better. On the other hand, if your long-term future is still unclear, then leasing is the way to go.
Either way, as long as you’ve done the proper evaluation, you can make the right decision.