Lease Decision
When making a lease decision and determining whether to rent or buy a property it is important to assess the current market, the expected future market, and of course the financial position of one’s business. Because leases and real estate purchases are potentially long-term commitments, the prudent decision maker must weigh many short-term and long-term factors before making any such decision.
Lease vs. Buy Decision
Rental is often chosen for short-term scenarios when an organization does not anticipate needing the real estate for long periods of time or if the real estate would serve a temporary purpose. For example, film crews or other organizations often rent real estate while they are filming in a particular city or location. On the other hand, if the business requires a long-term property then it is usually more cost-effective to purchase the real estate, since the long term savings will be significant.
In some cases, a lease may be more desirable than a purchase. For example, if a business owner anticipates the value of real estate to decline in the near future, then leasing gives the business the ability to wait out the decline and evaluate the market at a later time. Likewise, if a business owner anticipates the market to improve in the near future then leasing gives the owner the ability to take advantage of increased value at the end of the lease term.
Financial Factors
When making a rental or purchase decision, the prudent decision maker must consider the financial factors involved in each situation. There are many financial costs and benefits associated with both leasing and purchasing which must be evaluated.
The primary benefit of renting is that it allows a business to use the real estate without making a long-term commitment or large initial financial outlay. Renting also frees up a business’s capital for other investments or expenditures. However, when leasing, one needs to account for rent increases, maintenance costs, and other costs associated with the lease.
When purchasing real estate, one must consider the full costs of ownership, including the down payment, loan payments, insurance, repairs, taxes, and other costs. On the other hand, purchase offers more security and the potential for appreciation in value over the long term.
Conclusion
In conclusion, rental or purchase is a complex decision that requires careful consideration of current and future markets, financial factors, and other factors. Given the strong potential for long-term benefits when purchasing real estate, it makes sense to consider a purchase when a business has the financial resources and can make a commitment to the property for at least 5-10 years.