Factors to Consider: Lease or Purchase of a Facility
Factors Favoring Leasing:
Cash flow. A business can conserve its cash flow by leasing. Under a lease, the initial cash expense for the facility will be a month’s rent and a security deposit.
Credit rating. The company has not established a credit rating sufficient to support a mortgage.
Maintenance. The landlord is responsible for maintaining the property.
Property. You have been unable to find a suitable property that is for sale.
Real estate values. The facility you have found meets the needs of the business but is located in an area where property values are declining.
Mobility. You are not sure that the facility will meet the future needs of the business.
Tax Savings: Rent is deductible as a business expense.
Factors Favoring Purchasing:
Long-term savings. In the long run, purchasing a facility is usually cheaper than leasing. In a lease, the landlord attempts to build a profit for himself into the rent. Payment of this profit premium can be avoided by buying the facility.
Location. For certain types of businesses, location is the most important factor. If you have found the perfect location for your business and established the business there, purchasing the property will ensure that the business will not have to move.
Control. There are substantial renovations that you want to make to the property, or you may want to control your own business hours and the way you do business. By purchasing the property, you have control over these matters (subject, of course, to local ordinances and zoning boards).
Property. You have been unable to find a suitable property to lease.
Real estate values. You have found a facility that meets your needs and is located in an area of appreciating land values.
Tax savings. Depreciating the property over time may bring you tax savings. In addition, if the property is financed, interest-based deductions are available.
The Economics
You gain the use of an asset whether you lease or purchase a facility. The main advantage of leasing is that your initial cash outlay is less than if you purchase. The main advantage of purchasing is that in the long run you end up paying out less than if you had leased, plus you get the benefit of any appreciation in the value of the property. Perhaps the only way to decide which avenue is right for you is to compare the economics by doing a cash flow analysis. This will provide you with an estimate of the amount of cash you would need to set aside today to cover the after-tax costs of each alternative.
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