Buying or Renting a Factory – Which is best?
07 April 2022
There are a number of important factors to consider when you are trying to decide whether buying or renting a factory is the best move for your business. In this article we’re going to explore these factors, ask some important questions, and try to determine which would be the best option for you. Read on to find out more.
The economics of renting Vs. buying a factory
One of the biggest advantages of renting a factory is the fact that your original outlay of cash intended to purchase an asset will typically be less for leasing than it would be for purchasing outright. That said, one advantage of buying is that you will ultimately end up paying less in the long term as you would if you lease. Additionally, if you do purchase you will get the added benefit of the potential appreciation in value.
One way of reconciling these factors is by doing an analysis of your net cash flows that would result from both purchasing and leasing a factory. In order to do so, you need to know certain facts such as:
- What are the purchase and/or financing terms (including closing costs)?
- What are the lease terms?
- What is your overall income tax rate?
- How long is the facility's expected life of usefulness (for depreciation purposes)?
- What is the asset's estimated value both when you sell it or at the end of its life of usefulness?
- The cost of capital.
- Consider any other costs that you may incur if you leased rather than purchase the factory (and vice versa).
In this light it’s important that you not only think about the short-term implications of your decision, but also the long-term.
Things to consider when making the decision to buy or rent a factory
So, what other important factors should you consider when making the decision to buy or rent a factory? The following factors are geared toward purchasing, rather than renting a factory:
- You’d like total control over the property in case you’d like to make substantial renovations. If you rent you will likely need to secure the landlord’s permission. However, when you own the factory you can do as you wish.
- You are thinking about the long-term cost. Purchasing is typically cheaper over the long-term as you won’t have to pay any rental fees and additional profit premiums.
- For many businesses the location of your factory is paramount. If you don’t want to give up this winning location, then owning the factory outright will give you the additional security you need.
- You have otherwise been unable to find a suitable factory to rent and the only facilities that tick every box are available for purchase only.
- You have found a particular area where land value is appreciating. If you own a property on appreciating land you can benefit from the increase in value, rather than renting it.
- Purchasing the factory outright may bring you significant tax savings.
Similarly, let’s look at the following important factors from the perspective of renting a factory, rather than purchasing it outright:
- Your current cash flow is important – particularly in the early years of your business development. Renting typically has less in the way of initial outlays allowing you to maintain your initial cash expense.
- You don’t want the burden of maintenance duties. When you lease there are many opportunities to place the maintenance duties on the landlord instead.
- You would like to retain your mobility. For example: the factory that you select now may not be suitable for your needs in the future.
- The credit rating of your company doesn’t support a mortgage. Whether your business is new or you have experienced financial difficult in the past, lenders may restrict your credit for a mortgage.
- You want to buy but you haven’t found a suitable space available and so renting the appropriate factory space is your only viable option for now.
- The factory may be in an area that is declining in real estate value. You may have found a factory that suits your needs for now but you do not want to make a purchase if the property is likely to decline in value.
Conclusion
As you can see there are many different factors to consider when making the decision to rent or buy a factory outright. So, take your time and do plenty of research, consider the short and long-term impacts of buying and renting, weight up the pros and cons of each and make an informed decision as to which is going to be the best decision for your business at this time.
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