When Buying Makes Sense

April 13, 2006

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The following factors, if relevant to your situation, may lead you to conclude that you should purchase, rather than lease, your business facility.

You want control of the property — maybe you intend to make substantial additions or renovations to the property. Or you decide to change your business hours or change something else about the way you are doing business. If you rent your facility, you may have to get your landlord's permission to make these changes. If, however, you own the property, there will be no one looking over your shoulder (expect maybe the zoning board!) to question your moves.
You can consider the long-term cost — a lease may sometimes beat out a purchase in terms of cash flow, particularly in the early years. But over the long haul, a purchase is usually cheaper because a landlord, in addition to paying all of the costs associated with purchasing and maintaining the property, will attempt to build in a profit for himself. You can avoid paying this profit premium by buying, rather than renting, the property.
You want to stay at the same location — for some businesses, such as certain retail and service businesses, location is all important. If you have established a winning business location, you don't want to lose it because of a rent escalation or because the landlord just wants the property for another use. If you own the facility, you won't have these worries.
You haven't found a suitable property to lease — you may want to lease, but have found all properties that would be suitable for your needs have been offered only for sale, rather than lease.
You are in an area of appreciating land values — if you will locate in an area where you think land values will continue to increase, it would be better to own the property (and thereby get the benefit of this appreciation if you ever sell) rather than to rent it. This is would be particularly true if you are able to spot this real estate trend before prices jump up in recognition of it.
A purchase may bring you tax savings — although, unlike rent, the money you use to purchase your facility is not deductible, you are allowed to recover this outlay over time by yearly depreciation deductions. If you financed your purchase, interest-paid deductions are also available. Depending on several factors, such as how long your have been in business, how profitable your business has been, and what portion of the purchase price or rent relates to the land itself — rather than to buildings — a purchase may actually cut your tax bill when compared with a lease.