06/ 02/ 2008
by Glenn Townes
It's an age-old adage that entrepreneurs have been asking themselves for years: Should I rent it or buy it? Add to the mix today's tenuous economy and many small business owners are asking themselves that question more frequently and with added trepidation. In trying to answer this nagging question, some argue that there are a number of variables to consider. It's a subjective choice that is usually made on these factors: Business philosophy; financial obligations and growth.
However, some small business industry experts contend that the buy versus lease quandary really becomes a hot button issue when a business begins to grow dramatically.
When the need for more employees, equipment and workspace starts to impugn on the quality of the product or service being provided. For example, if deadlines for the delivery of a product or service are continually missed or delayed due to the lack of manpower, space or equipment, or if the product or service begins to decline in quality, then perhaps it is time to re-examine your location.
There are two key factors entrepreneurs should zero in on when trying to determine whether leasing a property is more beneficial economically or out and out buying the property is more lucrative. Growth potential is the first thing to consider. Is your company expected to grow by leaps and bounds in the next two to five years? What are you basing this fact on? Trends in the industry? A new product or service that will be available in a few years that will enhance your business? An expected cash windfall in the next year or two that will enable you to push your company to a new level? If you answered yes to some or all of the questions, then perhaps flat out buying a commercial real estate property may not be the wisest choice.
Purchasing a property that merely accommodates a business owner's current need and that will likely become too small in the near future is only a band-aid approach to the problem. When the business grows in the following two to five years, the owner will likely find himself in the same predicament.
Another advantage to leasing is that a business owner avoids getting stuck with expensive and empty space in buildings that are simply too large. Purchasing a property usually requires a larger outlay of capital from the prospective owner in order to secure financing. Other benefits to leasing are:
- Credit ratings are less important to secure the property.
- You don't have to worry about quickly selling property if another move becomes necessary
- The rents you pay on a leased property can translate into tax deductions.
On the down side, rental rates regularly increase, rental property does not accrue equity value and tenants may be forced to move out when the lease ends. Also, owning a property translates into a hefty tax deduction each year for depreciation and interest paid on the mortgage. An owner is free to lease out extra or unused space to other tenants and generate additional income. Owners are also free to make changes to the property without having to obtain permission; they also avoid rental increases.
Finally, when deciding which option is best for you and your small business, it may be wise to gauge whether your company will make more money investing in the business itself as opposed to investing in real estate. For example, a lot of companies don't want to be in the real estate business. Many prefer to have complete flexibility in running the business and adapt to changes as they occur as opposed to getting stuck with a property that won't fully accommodate their business in the future.
