Should You Lease or Buy the Property Where You Want to Do Business?

Every business presents its founder with numerous decisions to make. One of the most important decisions is whether to lease or buy the property where you plan to do business. There are a number of good reasons to lease, and even more good reasons to buy. Let’s take a look at some of the factors on either side of the decision—but first, a couple of true stories to put things in perspective for you:

My friend Don owned a sandwich shop at the beach in New Jersey. He spent his days making hoagies and chatting with tourists about the weekly weather forecast and the latest stock market shenanigans. Life was good.

Equity Appreciation

After many years of operating this business, Don met a special lady from California. He fell in love with her and decided he wanted to move to the west coast to be with her. When he negotiated the sale of the business, he was pleasantly surprised to learn that it was valued higher than he had ever imagined. The reason: He owned the property where he conducted business, and the property had appreciated sharply in value since his original purchase. He was rich—not because of the business itself, but because of the equity he’d built in the property.

Ownership Changes

My friend Stacey had a completely different experience with her business. She was a farmer. Her business was selling fresh vegetables from a farm stand in southern California. She couldn’t afford to buy her property upfront, so she leased the land she needed to set up her vegetable garden and farm stand.

After several years of profitable business operations, she was confronted by an awful surprise: Her landlord refused to renew her lease. He had decided to sell the property to a real estate investor.

Stacey was effectively put out of business by the loss of the lease. She was unable to find another property in the same area with rental payments in the same general price range.

Real Estate Value Fluctuations

One of the most important factors in deciding whether to lease or buy: Is your ideal property in an area where real estate values are appreciating or declining?

If real estate values are appreciating, buying the property is probably the smarter move. Failure to buy the property is likely to result in a situation like Stacey’s, because the property may become more valuable to your landlord for some purpose other than yours. At best, you’d probably be facing steep annual increases in rent. At worst, you could lose your use of the property altogether, as Stacey did.

In contrast, if you were to buy the property, you’d be likely to end up in a situation like Don’s. Your business would have an extremely valuable asset.

If the property you want to use is located in an area where real estate values are decreasing, it’s less straightforward whether or not to buy it. There is substantial risk in tying up money in an asset that will depreciate.

The next big question to consider: Can you afford the property you want to buy? To answer this question, it’s helpful to take the following two steps:

1. Perform a cash flow analysis, and
2. Do the math on mortgages using a mortgage calculator.

Doing these two things will give you solid insights on whether or not you can afford to make the mortgage payments on a property. If you can’t afford the mortgage, leasing is probably the way to go.

These are some of the most important considerations to take into account when you decide whether to buy or lease a property for your business. Best wishes with making the decision that will benefit your business the most.