You should compare the benefits of leasing versus buying your property from a cash standpoint, as well as the more obvious needs standpoint, such as long term space requirements and expansion possibilities. While there are benefits to both options, for startups there appear to be more benefits to leasing than buying. Cash flow is, of course, an issue and buying takes a larger portion of your hard earned cash up front. Here are some other monetary benefits of leasing:
• Your credit rating will not be quite as critical for leasing as it would be for buying. So again, for startups, this might be a sticking point.
• Your monthly lease payment is tax deductible because it’s a business expense.
• You may be free from paying for building maintenance.
Here are some non-monetary benefits of leasing:
• Freedom to sublet and move to another location if you find the need to.
• No hassle of selling before you can move to another location.
• No loss from owning a building in a bad real estate market.
• No assignment of personnel to oversee property issues that the owner should oversee.
Buying also has its benefits. It all depends on your situation and the type of business you’re in. Here are some of the monetary benefits of buying:
• Interest on the mortgage loan is tax deductible.
• You can take annual depreciation deductions on your taxes.
• In the long run, you’ll probably come out ahead because you won’t be facing increases in rent.
• You’ll benefit financially if the real estate market is good when you sell.
• You may be able to lease out a portion of the building if you determine that you have excess space.
• If you need to make substantial changes to the building to accommodate your business, those changes are owned by you.
Non-monetary benefits of buying include:
• You can make any changes you want to the property.
• The hours of your business can be whatever you want them to be.
• You are free to stay in the same location as long as you wish.
Cash Flow Analysis
If you can’t make a decision based on these pluses and minuses, you can (and probably should) do a cash flow analysis to see which option makes more sense from a cash standpoint. Before you can do this, however, you have to have all of the necessary information for making your comparison. This includes information like the full cost of purchasing, the terms of the lease, the depreciated value of the property at the time you would want to move, an estimate of the property’s value at that time, estimates of maintenance costs, and your tax rates.