Owners of single-location retail stores may have a great deal of flexibility in selecting locations. The economics of whether or not to lease property can be intricate. Here are some considerations that may affect your decision to rent or own the building for your store.
Comparison of Buying and Leasing
In most comparisons of buying vs. leasing, the key factor is how long the business owner intends to stay in that location. If you expect to remain in one spot for 15 or more years, then buying will save hundreds of thousands of dollars in the long run. But, if you plan to stay in one place for no more than seven years, the costs of buying vs. leasing are about the same. If you think you will stay in that spot for under seven years, it will be less expensive to lease the space.
In general, it is less expensive to start off leasing your retail space. This is mostly due to the fact that you don’t need to have the down payment required to make a purchase. When you lease, you are not responsible for repairs to the building or for insurance on the structure. You will still need inventory, liability, and crime insurance, but the structure itself is usually the responsibility of the owner.
Purchasing property is usually less expensive for the long term because monthly payments may be lower. However, all of the maintenance, taxes, and insurance are your responsibility.
To determine whether you should lease or own, take a good look at your cash flow chart. Your cash flow analysis needs to take into account the following factors for buying a store:
- Closing costs, down payment, and fees associated with purchasing a store
- Lease terms
- Rates for federal and state income tax
- Projected depreciation of the property and it’s length of usefulness to your business
- The value of the property when you sell it
- The value of the property when you no longer find it useful for your store
- The capital cost
- Additional costs such as those listed above:
- Maintenance
- Property taxes
- Insurance
Long Term Effects of Your Decision
One of the long-term effects of leasing or renting space is that the space may become unavailable to you at some point. A 10-year lease may seem secure, and you may think you’ll still be around in 10 years. However, in that period of time, you will build a clientele that you may lose if you have to move somewhere else later. Will you need to stay at that location indefinitely, or do you plan to move to the latest, fresh shopping district?
Retail space is usually not ready for the renter to immediately set up shop. Will the landlord allow you to make changes to the property?
On the other hand, purchasing a building before you are ready could present a hardship on your business. The immediate costs of purchasing, plus the cost of renovations, maintenance, and taxes, may place too much of a strain on your new business. Additionally, if your property is in a declining neighborhood, you could suffer a loss upon selling.
Depreciating Property Values
Suppose the most you can afford is space that is not on the main shopping route in your city or town. If you suspect that this property will decline in value in the future, it is, of course, safer to lease. It may be available for purchase at a low price, but in the long term, will it be worth it to be away from the mainstream. You need to consider not only facilities but the safety of yourself and your customers.
Appreciating Land Values
Most property appreciates through the years. If you have an opportunity to purchase prime property, you will make more money when you sell. However, this property may be outside of your cash flow amounts. If you are lucky enough to be able to predict the future, and where the prices are about to appreciate in a particular area, you should move on a purchase.
If you lease in such an area, the landlord may raise your rent or decide to sell the property out from under you.
Purchase Property When:
- You want to control the property. This allows you to make the renovations you want, within codes and zoning requirements.
- You want to save money in the long run. Landlords are in business to make money, just as you are. You’ll probably pay more in rent than you would on property payments. Purchasing requires fees and closing costs, but the property appreciates, adding value to your business.
- You want to control the location. When you purchase property, you have control of whether or not you stay in one location. You can sell if you need to move, but, you won’t be forced out by a landlord who wants the property for someone else, or wants to overcharge you for rent.
- You can’t find decent property to rent.
- You want the tax savings.
- You can afford the extra expense of closing, taxes, and maintenance of property.
Lease Property When:
- Immediate cash flow is a problem.
- You don’t want the cost of maintenance. This can include roofing, plumbing repairs and maintenance, HVAC, and parking lot/sidewalk maintenance.
- You think you may want to move in the next few years.
- Your business is too new for a good credit score.
- None of the properties you want are for sale.
- Your desired location is in an area of declining values for real estate.
- You want to deduct all of your costs for your facility.