I have an excellent guest post today from my colleague, Bert Doerhoff.
Buy or Lease: That is the Question
Whether your plans are to move into a new office building or to attain more equipment for your business, you always have to make the decision to either buy or lease. Before we go any further into that decision-making process, it is important to understand whether buying or leasing your business’ building or equipment is a better decision.
A lease is a contracted agreement that allows you partial ownership of an item for a specific period of time with periodic payments. When you lease a car for example, you sign a contract that grants you ownership of the car for a specified period of time. In return, you make periodic payments to the lessor (the person leasing you the car).
Leasing is a great option for business owners with a new or growing business. For example, your company grows in terms of business and staff. This is an excellent option when the office you are currently in has become too small, and you do not want to or cannot afford to buy a new office. If there is continued growth, leasing will also prevent you from having to invest a substantial sum of money into a property that might not be able to be able provide all of your future needs.
When you make the decision to buy you are taking complete ownership of the object or property. If your company is stable and you are looking at a permanent office building, then it will probably suit you better to purchase a building.
When you lease an office building, there is no possibility to gain any profit off of the future sale of the building. When you buy, however, potential profit is possible if the value of the building appreciates. There is also a risk that the property value might depreciate, but you would still be able to sell the office building for money, whereas a lease would offer no such option.
Many aspects come into play when deciding to buy or lease, and they apply to every individual in a different way. For some the factor will be an advantage, and for others that same factor will be a disadvantage. Below are a few things to consider when buying or leasing.
Time plays a big part in the decision to buy or lease. A great example of this would be your company’s computer system. If your firm has to stay as up to date as possible with the ever-changing industry, then leasing is a better decision. This is because you have to update so often, that it would cost you way more to purchase every time. On the other hand, if your company doesn’t need to upgrade very often, then it is a better decision to just go ahead and buy.
Stability or Expansion:
We discussed this earlier, but it is important to understand where your business stands in terms of growth. If your company is still in growing mode, then it is a better idea to lease commercial real estate because you are not tied down to the building when you need to move again. However, if your company is stable, then it is a better idea to purchase the real estate.
When you purchase, payments on that purchase will discontinue at some point. When you lease, payments continue until the life of the lease has ended. The purchase of an object, such as commercial real estate, will normally require a greater down payment than a lease. When you lease real estate, it will usually require a cash outlay for the first and last month’s rent.
A major part of the decision is personal preference. If you’re deciding on whether to buy or lease company cars it simply depends on your preference. If you like to have a new car every few years, then your best option is to lease, because the trade in value of your car plummets as soon as you drive it off of the lot. All you have to do when your lease is up is return the car and select a new car to lease. If you’re not the type to change cars frequently, then you probably would prefer to buy the vehicle.
Consideration of these factors when making a decision to buy or lease will help make the process move quicker and smoother. Your time is valuable as an owner; so planning early for any purchase will help your business stay as efficient as possible.
About the Author:
Bert Doerhoff is owner and founder of Accubiz, a firm providing accounting services out of Jefferson City, Missouri. Accubiz specializes in small business accounting, outsourced bookkeeping and wealth management. Prior to opening his own firm, Doerhoff worked for Peat, Marwich, Mitchell & Co, which is currently known as KPMG. Frequently, he speaks at state level and national conferences on various business management topics.
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