To Buy or Not to Buy: What Does Your Business Need?

2/11/2016

Whether this year or sometime in the future, the time is coming when you will be faced with a real estate decision - is buying or leasing the best strategy for you and your business? This is an important decision that must be considered objectively prior to charting your course.

Let us look at 3 aspects to evaluate the buy vs lease decision.

1 Cost
2 Capital
3 Company History

COST

What is the monthly budget for the company’s building(s)?

The overall occupancy cost per square foot (“PSF”) is the base NET rent or mortgage cost PSF plus operating expenses. The additional operating expenses (taxes, insurance and maintenance) are constant in either scenario. Generally, it costs more PSF to purchase than to rent a warehouse. So, how much more and what are the benefits in doing so? Alternatively, how much more building can you get if you rent instead of buy?

REAL LIFE SCENARIO:

Potential Benefits of Ownership or Leasing
Ownership Benefits:

long term appreciation
acquiring wealth
tax advantages, depreciation, and expense write offs (consult your CPA)

Leasing Benefits:

lower monthly cost
acquiring more total space
flexibility for future

A professional real estate agent can help you evaluate the cost basis of each scenario and can also work with your CPA regarding the above benefit considerations.

CAPITAL

SBA financing with only 10% as the down payment.

If 10-15% cash is the bulk of your working capital, it may not be best to tie that money up in a new building.

Other items need capital:

reserves for building maintenance & improvements
business opportunities
weathering a slowdown in the economy

Businesses need flexibility and if all the working capital is tied up in the down payment that could put you in a pinch should one of these items come up. Therefore, if you do not have significant cash reserves in addition to the down payment, renting could be the better alternative.

COMPANY HISTORY

Where will the company be in the next 3, 5, 7 and/or 10 years?

Questions to Consider:

How long has your company been around?
Are you a local business or a national/regional company?
How long have you been at your current location (and your previous one)?
What is the projected inventory and sales growth in the coming years?

Evaluating the past performance gives us a glimpse into the future. Knowing the history will help forecast future needs. If the size of the warehouse needs fluctuate every 2-3 years, buying may not be the best option for you. Depending on market cycles, it is rarely a good idea to buy a building if you cannot project being in that property for the next 5-7 years minimum. Do you need future flexibility or will you be stable?

In Conclusion,
Considering these three important items, let me help you to determine what the current price on the market is, and if you have sufficient down payment. For some businesses, buying is a great strategy. However, for many, leasing is a superior option based on the nature of their business and future objectives.