Considerations for that important lease vs buy decision
At some point almost every business owner asks, Should I lease or buy building space? Its an important question without an easy answer. You must compare the benefits by considering:
- cash flow
- market fluctuation
- income taxes
To thrive, you must maintain a positive cash flow. If you buy, youll make a large cash down payment of the purchase price, anywhere from 10% to 25%. Because buying real estate ties up large amounts of cash, it may make better sense to invest in your business and lease needed space.
Flexibility is another consideration, and leasing typically provides it. This is the main reason start-ups and businesses in growth phases usually lease. More stable businesses, where flexibility is not as important, can consider buying.
Depending on your business, choosing the right location is one of the biggest decisions youll face. If your businesss growth depends on location, leasing may be the best option given the high cost of building in a prime location.
What about the investment value of buying your own space? The ultimate goal for investing in real estate is appreciation. The obvious risk is a decline in market value. Currently, property values are decreasing in most areas of the country. For example, a recent study has shown that commercial property values in Atlanta have dropped an average of 15 percent to 25 percent over the past three years.
Taxes are another consideration. If you lease building space, the total payments are usually deductible on your tax return. By contrast, when you own a building, you can deduct only your interest expense and real estate taxes. Both expenses will affect current your cash flow.
About the author
Chris Steedly CPA is a tax specialist at Williams Benator & Libby in Atlanta, GA. Chris specializes in Federal and Multi-State income tax issues.