Which is best? Buying vs. leasing consignment store property
Decisions. Decisions. Should you buy or lease your consignment store property?
Don’t let the leasing vs. buying question overwhelm you. Take a look at some of the pros and cons. Then, make a decision on which is best for your consignment store property. No matter what you choose, remember it’s always location, location, location!
Making the right choice
Pros to buying
- More control. Since the building is yours, you control changes or improvements. The stability of owning vs. leasing means you’re not at the whim of others.
- Equity. Use the building as collateral for a line of credit or other financing.
- Sublet. Add revenue by leasing unused space in the building.
- Tax Deductions. Deduct your interest and annual depreciation expense, as well as other non-mortgage related expenses.
- No Surprises. Never receive a rent increase or eviction notice.
- Resale Value. If you’ve chosen your location wisely, selling your building should net you a profit. In regions where land values are appreciating, investing in real estate can be good for the future of your business.
Pros to leasing
- More Liquidity. No high upfront costs are needed. 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.
- Tax Deductions. Your monthly rental fee is tax deductible.
- Greater Flexibility. Freedom to change locations due to growth or down sizing is much easier.
- Less Responsibility. More time and money to build your business.
- No Market Value Worries. Regardless of the changes in the commercial real estate market, you are safe.
- Shorter Terms. Most contracts only last a few years. If you’re unhappy with your location, you’re free to move on.
Cons to Buying
- Ties up Capital. In addition to your down payment, your initial cash outlay includes a building appraisal and inspection fees, closing costs and possible repair expenses. Often, those costs are difficult to budget ahead of time.
- You are the Landlord. You are responsible for ongoing repairs, maintenance, property taxes and all operating expenses.
- Capital Loss. If you haven’t chosen your location wisely, your property may actually decrease in value.
- Longer Terms. Mortgage contracts generally range from 15 to 30 years.
- Legal Risks. Being the owner, you are responsible for the safety and security of your customers as well as anyone who sublets space from you.
Cons to Leasing
- Expensive. A rental lease comes with a security deposit, payment of the first month’s rent in advance, pre-lease inspection 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. Rental rates rarely decrease.
- Possible Surprises. Leasing gives you no control over the building or the landlord. Selling the property, raising rates or forcing you to move are always possibilities.
- Zero Equity. There’s no additional income potential.
Making the final decision on your consignment store property
There’s a lot to consider when deciding between buying or leasing. Regardless of which one you choose, you’ll still have store expenses such as insurance, salaries, utilities, display fixtures, hardware, software, labels, signage, etc. Consider these factors when choosing:
- How long you’ve been in business. 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. Sign up for our Getting Started Success Kit if you’re just starting out. It’s filled with great ideas for opening a consignment business. A well-established consignment shop that has no expansion plans is in a good position to buy their property.
- Growth Opportunities. When leasing, look for a building that allows for expansion opportunities if your business takes off. If it is within your financial means and expertise, consider buying a building that offers more space than you need. You can rent out the extra space, helping you diversify your income streams.
- Your vision for your business. Know the direction you want to take your business upfront. If you’re opening your shop while your kids are still at home, but plan to close after they’ve moved out, by all means rent. If this is a career move for a long-term business, consider buying.
- Stability vs. Flexibility. Which is more important to you? A mortgage with a set monthly fee can be comforting. However, the freedom to change, plus the additional cash flow offers stress-free flexibility too.
- The real estate market in your area. Some areas are seeing a real boon in real estate pricing. Knowing whether it’s a bubble waiting to burst or a steady upward trend is difficult. As in housing, you never want to own the most expensive building on the block. Determine the market for your store. Research neighborhoods. Choose your consignment store property based on reaching your target demographic.
- A cash-flow analysis. Bizfilings offers a great tool to analyze cash flow. Although difficult to determine in a consignment business, it’s still a necessary analysis.
Some final advice
Finally, the wisdom that only Dave Ramsey, the financial guru can provide, “…put your business on solid ground, slowly and steadily. Lease your space and use your money to reinvest in your business. Make it grow. Once your business is really rocking, you can consider getting into the real estate business.”
Leasing vs. buying – How Do You Decide?
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.