Question

Hello,

I wanna ask about how the recession affects the investment. For example, we bought an office building by lease. How much the recession will affect our lease if the value of the building falls next year. We're about to compare between buying by lease and mortgage.

Thank you so much for your help.

Mila

Answer 1

Hi Mila,

I understand your concern here and will try my level best to give you a possible solution. Lets look at both the scenarios below -

1. Buying office building by lease

Buying commercial real estate has its downside risks. In recession environments,it might be cheaper to lease rather than buy due to the risk of owning an asset that might decline in value.

When deciding whether to buy or lease commercial real estate, the number one concern is typically the difference in costs. For office,properties, net operating income often continues to improve through a mild recession due to lease terms that average about five years for those property types. Even if a landlord has to lower the asking rent on a property, tenants renewing a lease will still end up paying more than they had been paying over the course of a lease term that is rolling over. NOI(Net Operating Income) therefore, remains positive.Even if the lease value falls, consider staying invested and you can look at recovering the rent when the downturn is gone.

Typically if your business stays in a place for longer than 7 years, then you should consider buying commercial real estate.

2. Buying by mortgage

When considering this option, carefully consider the amount of leverage which is prudent in a given situation. Mortgage financing to property buyers did not fare better in 2016 with unpleasant consequences as per the news reports for potential property buyers and real estate operators.

The downpayment requirements may be much higher as lenders are risk averse in a recession environment.

Kindly consider the above scenarios and make an informed decision. Hope this helps!