TOOL KIT: Real Estate - The Buy or Lease Decision
May 15, 2015
There are many factors every business owner needs to consider when getting ready to make the decision whether to buy or rent a business facility. Careful thought should be given to financial, tax, and business-specific elements.
Ryan Smith a CPA with Petersen CPA’s & Advisors explains that businesses need to carefully consider their cashflow situation before making a decision on leasing or owning business property. Start-up businesses need to be flexible in the first several years to the many variables that can cause the business to change course. Stable or mature businesses have a better idea of their long term needs so locking into a purchase may make more sense.
Ryan advises closely analyzing the advantages and disadvantages of both options and eliciting some professional advice on the impacts these choices will have on their finances. Here are some things to consider when making a decision:
- No down payment is required. You typically need a down payment to buy property, which can take a huge chunk out of your startup budget or cash reserves. By leasing, you can invest that capital in growing your business — and keep the option of buying open for later, when your finances are stable.
- Repairs are handled by property management. When you lease space, if the air conditioner breaks (as it eventually will), all you’ll have to do is call the property manager and wait for someone to show up and fix it. If you own that same space, you’ll be forking over thousands of dollars on repairs every time something major fails.
- You have short-term options. As your business expands, it may grow out of its space. By signing a lease of one to five years, you’ll have the option to move to a new spot as your needs change. Leasing also gives you the opportunity to try out an area of town to determine whether it’s a convenient location for your clients and staff.
- Property is an investment. Real estate is an investment that pays off over time. Granted, property values have been on the decline in recent years. But that means you may be able to buy low now and see the value appreciate over the next few years. In fact, given the low interest rates and prices of late, it’s never been a better time to buy commercial real estate.
- You can save money. Although a down payment can tax your budget, buying a property gives you the option of refinancing and eventually paying off the mortgage balance (after which there’s no monthly payment). Because rents are subject to increase over time, owning can be better than leasing in the long run.
- You are your own landlord. When you own a space, you have control over what you do to it. If you want to paint the walls purple or update the windows and doors, you can — without needing anyone else’s permission. This freedom can come in handy as your business evolves.
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