Is it just us or do you also have those moments when you feel excited to be looking at new properties, but also confused because you are not sure if you should be spending your money on investing, or leasing? Are you not tired of all the extra information that there is on the internet, making your decision even more difficult than before? Do you also think of asking your friends who are in the real estate market, but get exhausted with the variety of opinions that you receive?
Don't worry, you are not alone in this pool of confusion! We too were debating on the topic of leasing vs. buying property till just a few moments ago. Now that we are clear with our decision, let us help you make one too.
Believe it or not, there is not a universal answer to the question of whether one should purchase or lease property. At the end of the day, it all depends on your personal needs, requirements, and the situation at hand. For some, purchasing property might be the best option because they want to settle down, and for some leasing might be the right choice to do keeping in mind their financial situation.
So, how do you make this decision? First, understand what leasing a property means for you. Leasing is a temporary arrangement between the owner of the property and the user (also known as a tenant) for a specific period and a decided amount of payment made by the user to the owner in exchange for the property. Once the decided tenure of the arrangement comes to an end as per the lease agreement, the property goes back to the owner if not stated otherwise in the initial contract.
Just for your information, here are 4 things that can happen after the termination of the lease agreement -
- The owner of the property leases it to a third party
- The lease is renewed by the current tenant for a decided time
- The owner sells the property to the tenant
- The property goes back to the owner
However, information on the post-termination of a lease agreement comes later on. What comes first is for you to decide whether leasing a property is a good investment for you.
Have you heard of people who make pros and cons lists to take major decisions in life? While it may sound petty right now, it will all start to make sense to you after we present you with a list of advantages and drawbacks that are associated with leasing property.
Also Read: Renting vs Buying A House
Pros of Leasing Property
Did you know that lease payments are considered operating expenses? Exactly! That means they are eligible for a tax deduction.
Zero Ownership Risk
Since you have no ownership of the property, you do not have to bear any risks associated with ownership either. You can let opportunities come your way, investing and doing real estate business as and when the need arises.
Balanced Cash Flow
If you have ever had second thoughts about leasing due to your financial situation, you have nothing to worry about. You can make the rental payments as per your flexibility and can also spread it over several months if needed. Talk it out with the owner, and work out an arrangement where you do not have to make a one-time cash payment.
Off-Balance Sheet Debt
The lease is considered different from debt; both are not treated the same by either lenders or banks. Your leasing will not be a part of the balance sheet, it will be classified as an off-balance sheet debt, hence, making it easier for you to get loans and pay off debts in the future.
When you lease a property, the ownership of the asset is still in the name of the lessor while you are just required to pay the rental expenses. This means that you get an opportunity to invest in various assets that might have not been affordable or in your plan if you would have purchased the property instead of leasing it.
Even in the least agreement signed by both the owner and the tenant, the clauses are always fairly flexible and have all kinds of scenarios drawn out along with their probable solutions. Be it the rental schedule or the duration of the agreement, all of it can be readily adjusted according to the genuine needs and requirements of the tenant. Note that this benefit also to a large extent depends on the owner of the property that you are leasing.
Also Read: BHK Full Form
Your lease rentals can be deducted from your taxable income. This means that you as a tenant have a lower obligation in bankruptcy as compared to debt financing. It will help you save money for the future and will let you utilize it for better property deals and investments when the time comes.
If you need a place to stay for a specific period and are looking for a temporary arrangement, leasing is your best option. Legal formalities involved in leasing are much less and easier than buying a property. You do not need to indulge in long-term borrowing from financial institutions and no mortgage is required either. Leasing can be considered the most effective way of financing fixed assets.
Cons of Leasing Property
Limited Financial Benefits
Since you are not an owner, there is not much that you can do after leasing. In case after moving in you realize that the property is not serving the purpose you thought it would, it will be difficult for you to terminate the lease agreement before is set to end date. Eventually, you will end up spending extra money for nothing, and not even receiving what you expected.
Just because a lease does not reflect on a balance sheet, does not mean it cannot create problems for you. If you decide to lease a property for the long term, the investors will consider the agreement as debt and this might reduce your chances of high rates of returns.
No matter how good a tenant you are or how much money you have been paying throughout your tenure, you will not end up becoming the owner of the asset at any point in time. While this may sound like instability to some, it feels like a waste of money to others.
Limited Access to Other Loans
Since long-term leasing agreements are considered as debt by financial institutions and investors, you might face challenges in securing loans in the future. Being granted home loans is already a tedious process, leasing might add to your list of worries.
If your objective is that of wealth maximization, leasing may not be the right way to go about it. Lease expenses give no appreciation in value, and they also significantly reduce the net income. This means limited or reduced returns till the time your lease agreement is not terminated.
It is solely your responsibility to maintain the property and make sure no damages are caused till the time you are a tenant there. You must ensure the property function of every utility at the property.
Processing and Documentation
Even if you are leasing for a short while, there is a complex process of documentation that both you and the owner will go through. There will be a proper inspection of the property and days of verifying your legal documents and credit history. Apart from all this, being on the same page with the owner in terms of the lease agreement and its clauses will also take up extra time.
Don't just make your decision in one day. Now that you have come across an article that provides you with a detailed account of what leasing is and the benefits and drawbacks that it can provide you with, take your own sweet time.
If need be, create your pros and cons list and see which one outweighs the other. At the end of the day, it is you who can do the greatest justice of creating such a list for yourself. You can also glance through what a lease agreement is and the various elements it includes to understand the entire leasing process better. You are best aware of your needs and requirements, and so you know what should be given priority and what elements can take the backseat with no major damage.
If you have indeed made your decision of leasing property, feel free to consult a real estate provider that can guide you to a plethora of options. You never know you might get lucky!
Enter the real estate world with a fresh and open mind, that is one virtue that will make this journey even more interesting, and help you find your very own dream home sooner than you may have expected!