Lease vs. Buying
By the Family Entertainment Center
Page 1, 2
To Lease or Buy
You should compare the benefits of leasing versus buying
your property from a cash standpoint, as well as the more
obvious needs standpoint, such as long term space requirements
and expansion possibilities.
Here are some other monetary
benefits of leasing:
- Your credit rating will not be quite as critical for
leasing as it would be for buying. So again, for startups,
this might be a sticking point.
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- Your monthly lease payment is tax deductible because
it's a business expense.
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- You may be free from paying for building maintenance.
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Here are some non-monetary
benefits of leasing:
- Freedom to sublet and move to another location if
you find the need to.
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- No hassle of selling before you can move to another
location.
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- No loss from owning a building in a bad real estate
market.
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- No assignment of personnel to oversee property
issues that the owner should oversee.
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Buying also has its
benefits. It all depends on your situation and the type
of business you re in. Here are some of the monetary
benefits of buying:
- Interest on the mortgage loan is tax deductible.
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- You can take annual depreciation deductions on your
taxes.
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- In the long run, you will probably come out ahead because
you won't be facing increases in rent.
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- You will benefit financially if the real estate market
is good when you sell.
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- You may be able to lease out a portion of the building
if you determine that you have excess space.
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- If you need to make substantial changes to the building
to accommodate your business, those changes are owned
by you and not your landlord.
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Non-monetary benefits
of buying include:
- You can make any changes you want to the property.
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- The hours of your business can be whatever you want
them to be.
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- You are free to stay in the same location
as long as you wish.
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While there are benefits to both options, for startups there appear to
be more benefits to leasing than buying. Cash flow is, of course, an issue
and buying takes a larger portion of your hard earned cash up front.
Looking for commercial lease property is a lot easier at commercial lease property.com
Cash Flow Analysis
If you can't make a decision based on these pluses and minuses, you
can (and probably should) do a cash flow analysis to see which option
makes more sense from a cash standpoint. Before you can do this, however,
you have to have all of the necessary information for making your comparison.
This includes information like the full cost of purchasing, the terms
of the lease, the depreciated value of the property at the time you would
want to move, an estimate of the property's value at that time, estimates
of maintenance costs, and your tax rates.
 To do the cash flow analysis, complete cash flow budgets that include
all of the expenses you would incur for either buying or leasing over
a set period of time. For the lease analysis, you will need to determine
your net cash outlay, which is the amount you end up spending on the lease
once you have subtracted the tax savings you receive from it. (Remember
your lease payment is considered a business expense.)
In order to compare apples to apples from a cash flow standpoint, you
also have to take into consideration the change in the value of today
s dollar versus a dollar five years from now. This are known as the discount
factor and can be calculated using most spreadsheet applications.
You will also have to know the amount of your interest deduction that
you will get on your business s taxes. You can arrive at this number by
multiplying the interest rate of the loan by each month's preceding balance.
Now for the tricky part ... remember above where I mentioned estimating
the value of the property when you would be selling it? This is the number
that will ultimately determine who wins in the battle of the benefits
of buying versus leasing.
One of the benefits you hope to count on is the longer you stay in the building, the better off you will
be because you will be gaining more and more equity. However, do you know
how long you will actually be there? Do you know what the real estate
market is going to do in that time period? Not unless you have a crystal
ball.
So, study the current market, as well as trends and predictions for
as far into the future as you can get. Keep in mind that the farther out
the prediction, the less reliable it will be. Arm yourself with as much
knowledge as you can, and then make your best estimate. You know your
business and you should have a good idea of where it is headed. If you
know you want to be in an area for the foreseen future (say 10 or more
years), the market is strong, and you have identified a building that
will suit your needs for that timeframe then go for it. Ten years of equity
can be substantial.
If you can get a good deal on the property (at or below market value)
then it certainly makes sense to buy if you will be there for ten years.
If you know the building is priced at or above the fair market value,
or if you think five years may be more the length of time you will be
there, or your ability as a start-up to acquire the necessary added
capital is limited, then think about offering to lease your space.
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