Lease vs Buy: How to Run the Math

A loan payment below your rent does not prove that buying is cheaper. Part of that payment reduces debt, which you get back only when you sell or refinance. The down payment is missing from the comparison, and so are replacement costs. So is whether the building is worth more or less at the end.

A better question is this: over the years we expect to stay, what does each path cost after we account for what we keep?

1. Choose a holding period, such as the years you are confident the location works.
2. Total the rent for that period, with its scheduled increases.
3. Total the buyer's cash out: down payment, closing costs, loan payments and owner-only costs.
4. Estimate the net sale proceeds at the end: sale price, less selling costs, less remaining loan balance.
5. Subtract those proceeds from the buyer's cash out.
6. Add the opportunity cost of the cash you put in at the start.
7. Compare, then change the assumptions and compare again.

Everything in this example is hypothetical, for illustration. None of it is market data or a forecast, and it is pre-tax. To keep it simple, assume a net lease, so property taxes, insurance and routine operating costs are about the same on either path and drop out of the comparison.

• Leasing: rent of $170,000 in year one, rising 3 percent a year. The 10-year total is $1,948,859.
• Buying: price of $2,000,000, with $400,000 down and $60,000 of closing costs, so $460,000 of cash at the start.
• Loan: $1,600,000 at an assumed 6 percent with a 25-year amortization. Payments are about $123,706 a year, or $1,237,059 over 10 years. About $1,221,632 is still owed at the end.
• Owner-only costs: a $25,000 annual reserve for major replacements, or $250,000 over 10 years.
• Buyer's cash out: $460,000 + $1,237,059 + $250,000 = $1,947,059.

So far the two paths look almost equal. The difference appears when the building is sold. Assume a sale at the $2,000,000 purchase price with selling costs of 5 percent. That is $1,900,000 of proceeds, less the $1,221,632 balance, leaving $678,368.

Subtract that from the buyer's cash out and the net cost of owning is $1,268,691. Now add opportunity cost. If the $460,000 could have earned 6 percent a year elsewhere, compounded over 10 years, it would have grown by about $363,790. The total for buying is $1,632,481, or $316,378 below the lease total in this example.

One result proves little. The value of the exercise comes from seeing which assumptions move the decision, so we run the same hypothetical with one change at a time.

• Lower sale price. At $1,700,000 after 10 years, net sale proceeds fall to $393,368 and the total for buying rises to $1,917,481. Buying is still ahead, but by only $31,378. Under these assumptions, the break-even sale price is about $1,666,969.
• Shorter stay. Over five years, rent totals $902,553. Buying totals $898,026 if you sell at $2,000,000, which is nearly a tie. If you sell at $1,700,000, buying totals $1,183,026, or $280,473 more than leasing.
• Higher return on your cash. If your business could earn 12 percent on that $460,000, opportunity cost over 10 years grows to $968,690. The total for buying becomes $2,237,381, which is $288,522 more than leasing.

In this hypothetical, the building is not what decides the result. Time in the building and what your cash could otherwise earn matter at least as much.

A short holding period punishes buying because closing and selling costs are spread over fewer years, and early loan payments repay relatively little principal. If your growth plans are uncertain, test the shorter case first.

The example is simple on purpose. Your finance team should tighten it before it informs a decision.

• ✓Did we use the same space, quality and location on both sides, or is the lease really for a different product?
• ✓Does the lease include free rent, tenant improvement money or other concessions, and did we count them?
• ✓Are operating costs actually equal, or does a gross lease or building age change them?
• ✓Did we include build-out on both paths, and how much of it would survive a sale?
• ✓Does the loan have a term shorter than its amortization, which means refinancing before the end of our period?
• ✓Did we model annual cash differences and discount them to today, as our CFO would for any other investment?
• ✓Have we priced what an unplanned move costs if the company outgrows the space?

Taxes belong in the final version. IRS Publication 334 (2025) says rent for property you use in your business is generally deductible, and addresses business interest and real estate taxes. IRS Publication 946 (2025) says land cannot be depreciated and lists nonresidential real property at 39 years. In the example, depreciating an assumed $1,600,000 building portion evenly would be about $41,026 a year, before first-year conventions. A later sale raises its own tax questions, so have your CPA model both paths for your entity.

Some of the reasons to buy or lease do not fit a spreadsheet. Ownership offers control over your location and improvements, and it can protect you from a landlord's renewal terms. It also concentrates your capital and your premises in one asset, and it makes it harder to leave if your business changes. A lease keeps capital free and gives you an exit date, though you may face rent increases and relocation risk when it ends.

The comparison also starts earlier than many owners assume. One Tenant Advisory Group client described the choice this way:

That is one company's situation, and yours may be different. Because TAG represents occupiers on both leases and purchases, we can price both paths using actual proposals, so your finance team compares real alternatives in place of guesses. Your lender and CPA should confirm the loan and tax inputs.