Is it better to own or lease? Of course, this is a question that troubles most of the people today. Although financial aspects play a huge role while making such a type of decision, there are also other important variables that you need to consider carefully. Here is a summary of the ‘intangible’ advantages and disadvantages all occupants should observe while deciding whether they should buy or lease.
Advantages of Leasing Property
1. Cash and Liquidity Resources
Rental needs few amounts of money as compared to ownership alternatives. Hence, it creates more capital for investing in the primary operations of the business as well as other expansion opportunities.
2. Financial Source
Leasing is also a captivating source of financing as the cost needed for rental falls is lower than the total cost of ownership. Let us take the example of a marginally or small profitable company. It may find traditional costs expensive or more complicated to meet, while a commercial land owner may be more willing to sign a lease with the firm.
3. Cost Predictability and Stability
The extended occupancy expenses of leasing are usually easier to budget and forecast. While certain types of contracts tend to expose tenants to small capital expenditures, several commercial leases prevent the tenant from unforeseen costs arising from the capital. Some good examples include structural repairs, mechanical systems, parking lot or roof replacement.
4. Tax Benefits
Unlike in ownership, the costs of occupancy while leasing are entirely deductible. Here, the owner should decrease the properties costs on improvement, but he or she cannot reduce the value of the land. Such a benefit helps to shield the business’s operational costs from state, federal and local income taxes.
Disadvantages of Leasing
Tenants often have little to no control over who their fellow tenants are or will be. The best you could do is file a complaint or lobby the owner to set some rules.
For all established businesses with quick access and control of capital resources, leasing might end up being a more costly alternative as compared to ownership.
3. No Equity Appreciation or Accumulation
Once you decide to lease instead of own property, there is a higher chance of realizing property owing to the recognition of the acquired property. Therefore, tenants cannot understand the type of accumulated equity through reducing the underlying property’s financing.
4. Contractual Obligations
Even when a leased property ends up being unsuitable or less desirable, or the business collapses, the tenant should continue to pay rent or face cash penalties if he fails to do so.
5. Losing Salvage Value
Several leases stipulate that certain improvements created by the tenant end up being the property of the landlord at the end of the leasing period. Similarly, the owner may need the tenant to remove certain improvements or modification made on the same premises at the expense of the tenant.
Although it doesn’t mention much, the above list summarizes several intangibles existing before choosing to buy or lease a commercial premise. When you finally arrive at this crucial stage in your entrepreneurship journey, remember to make the right decision!