Some things to consider when deciding whether to lease or buy are cash flow, equity, control, building maintenance, and flexibility.
I’ve worked with companies that preferred to lease buildings and others that preferred to buy buildings. Let’s look at a few pros and cons of leasing vs. buying.
- Cash Flow: Sometimes, the choice between buying and leasing is made solely based on the cash flow constraints of the company. Leasing takes less cash at the start. Commercial real estate loans often require a down payment of 20-25% of the building’s value.
- Equity and Control: Leasing requires less cash up-front, but you forego control of the building and any appreciation in the value of the building.
- Building Management and Maintenance: I’ve been in multiple discussions where the own vs lease decision comes down to the company’s appetite for managing the buildings. I’ve had facilities staff report to me. Managing buildings is hard work. If you have a small number of locations, it may be easier to lease and have someone else manage the properties. As you grow, controlling building maintenance makes more sense economically and from a quality standpoint.
- Flexibility: Some see leasing as providing the most flexibility. You may be able to sign a short lease to test a market for a few years. You may also sign a longer lease but make sure you have the ability to sublease the space. Buying a building also comes with some flexibility. You can build or buy a larger building than you need. You then lease out the parts you don’t need now to help cover the cost of the building. Over time, you can then expand into the leased spaces.
I wish you the lease or building purchase that fits your business. I wish you well.
- Rob Stephens
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