Many business owners opt for renting a property for their business instead of buying it. The most common reason is that it costs less. However, purchasing a building has its own set of benefits and advantages.
Yet it’s not easy to determine which road you should take. That’s what we aim to help you with, which is why we’ll explain in this piece when is the right time to stop leasing and the time to buy a building for your business.
The Economics of Buying vs. Leasing
First and foremost, we have to look at the economics of both options as they play the biggest part in your decision.
So, what are the main differences:
- When you lease, you initially pay a much smaller amount, but you end up paying more in the long run
- When you buy, you initially spend more, but your long-term costs are significantly lower
Both options have their advantages, so you have to reconcile the two and find which one is better. You can do that by analyzing the cash flow of both options. That way, you’ll see if you stand to lose more or gain more when you buy the property.
To do this, you need to look at the following facts:
- The terms of the lease
- The combined federal and state income tax rate
- How long your business will use the building as that affects depreciation
- The estimated value of the asset for when you decide to sell it
- Cost of capital
- All the other expenses you’ll have once you buy the building
In addition to this, you need to take a look at what your long-term plans are for the business and the building you’re considering to buy. Most business owners look at the short-term, which is why you need to get out of that mindset and consider the future. Will it be necessary for your business to stay in the same location in the future? Do you think your business will require modifications to the building that the landlord might not accept? If the answers to questions like these end up being positive, then it will be best to buy the building.
Other Questions to Consider
Several other questions can help you decide whether or not you should buy the building:
- Do you need to control the building for your business to operate smoothly and advance?
- Are you able to cover the potential losses you might have in the first year or so?
- Are most buildings that you find suitable for your business only offered for sale, and not for renting?
- Are you ready to take over all the maintenance duties and expenses that would otherwise be covered by the owner?
- Is the value of the land where the building is located increasing, and will it most likely continue to do so?
- Is the building located in an opportunity zone or in a location that offers tax incentives for owning properties?
If your answer to most or all of these questions is a resounding yes, then there’s no need to continue to deliberate. The decision has already been made — you should buy the building. However, if the answers are mostly negative, then you should choose to lease instead.
If you require some further assistance in your decision-making process, you may reach us at firstname.lastname@example.org