Leasing vs. buying – How Do You Decide?
September 26, 2014
3 factors to help you answer the leasing vs. buying question
Business Owner’s Toolkit offers some great advice to help you evaluate whether you should lease or buy your resale space. It turns out there are at least 3 important factors to take into consideration. Don’t let the leasing vs. buying question overwhelm you. Make some calculations and you can answer it quickly.
1.) Cash outlay
There are many upfront costs associated with purchasing a property, and they are often difficult to budget for ahead of time. In addition to your down payment, your initial cash outlay can include building appraisal and inspection fees, closing costs, repair expenses and other overhead expenditures.
This is not to imply however that there isn’t a significant cash outlay when you choose to rent. Often a rental lease comes with a security deposit, payment of the first month’s rent in advance and a utilities security deposit. Depending on your location, there may also be an advance payment for the shopping center’s or strip mall’s operating expenses and property taxes.
Either way, you know when you open a shop, you’ll have other normal expenses such as insurance, utilities, display fixtures, hardware, software, labels, signage, etc.
2.) Future growth
If you are just launching your consignment or resale shop, it’s best to leave some room for growth. Leasing can usually provide that room better than purchasing. If it falls within your budget, look for a building that offers multiple office spaces. This will attract business from other retailers too. If a spot opens up and you need more room, you may be able to expand the size of your sales floor or storage area without a lot of additional expense.
A well-established consignment shop that has no expansion plans is in a good position to buy a property. If you decide to buy a retail space and then outgrow it, you can rent out the area later.
3.) Asset vs. debt liability
In regions where land values are appreciating, investing in real estate can be good for the future of your business. If it is within your financial means and expertise to do so, consider buying a building that offers more space than you need. You can rent out the extra space, helping you diversify your income streams.
If working capital is more important, leasing is a better option. When you invest less in the location, you have more money to devote toward business operations. In addition, with a lower debt to income ratio, you may be able to obtain a small business loan if needed.
One of the best ways to make a determination whether leasing vs. buying is right for you is to do a cash-flow analysis. Once again Business Owner’s Toolkit offers some important points to consider.
If you’re just starting a resale or consignment business, download our free Getting Started Success Kit. There are tips on everything from naming your shop to marketing.
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