When you’re looking for equipment or real estate for your organization, the lease vs buy decision is a critical analysis that your team must perform. Whether you decide to lease or buy is dependent on several factors, such as the type of item you’re debating over (real estate or equipment), the fair value of the asset, how you want your company financials to look over time, and the amount of capital your business currently has. Sometimes, the right decision is hard to come to, so a lease vs buy calculator is helpful in making the right choice. Below are some advantages to both leasing and buying.
Benefits of leasing
There are many reasons why companies decide to lease items rather than buy them. When leasing, a company can benefit from the advantages of ownership without the risk – in the case of real estate, most maintenance is handled by the lessor. However, the lessee might pay a small fee for common area maintenance.
Leasing can also help provide liquidity to organizations that need it. Purchasing an asset can tie up resources that the organization may end up needing at a later date.
Benefits of buying
Buying is often considered to be a good long-term investment. Given that rent payments are likely to increase each year and payments on a building you own typically have a fixed overhead, buying may be the best investment for your company. For a business that is stable and plans to stay in one place for a long time, buying may be more sensible than leasing real estate.
Five factors to consider for both equipment and real estate
When you’re performing your lease vs buy analysis, there are several questions you must ask yourself:
1. How long will you need an item and how much is it worth?
No matter your industry, every business has certain equipment they must have in order to get the job done. Some types of equipment, such as computers, will need to be updated in a semi-regular time frame, and having a lease allows your team to stay up to date. Additionally, things like forklifts, golf carts, and other tools can be expensive. Leasing them allows you to use them without exorbitant fees.
2. What is feasible for your budget?
Even though leasing equipment is often less expensive, it is important to be sure you know the terms of your lease. Be sure your lease ends around the same time you’ll be done using the equipment or your company is ready to move into a bigger space, or you could end up overpaying. Additionally, keep in mind that equipment can be sold when you no longer need it.
3. Do you need your equipment or real estate to be customized?
If you need equipment specifically tailored to your needs, leasing may not be the route to go. It is easier to purchase equipment and have it modified than to negotiate with your lessor about it. When it comes to real estate, your ability to update the space you’re moving in to may be included in your contract. Sometimes, your landlord may include a tenant improvement allowance, or TIA, to your contract as an incentive to sign. However, there are still likely guidelines you must stick to when making updates to a leased space.
4. Have you factored in depreciation?
Equipment and real estate depreciate over time. When you lease, you don’t have to worry as much about the decline in property or equipment value. However, purchasing equipment can mean tax breaks, either in the immediate or long-term future. With Section 179, a business can deduct 100 percent of a qualified item if they use it within the first year. With Bonus Depreciation, businesses can recover their expenses over time.
5. Have you examined your business’s income statement?
Having a lease means you don’t need to worry as much about tying up capital, especially if your business is newer. Before you put money on the line, however, it is important to determine whether or not your business can support the cost of your lease or your loan. Remember that your lease payment is likely to increase overtime, but also keep in mind the added costs that come with owning equipment or real estate.
How lease vs buy decisions are impacted by the new lease accounting standards
Nearly all leases are to be recorded on your balance sheet, whether you follow U.S. GAAP or IFRS. Deciding whether to lease or buy, then, is no longer a decision based on the ability to avoid lease classification. Your decision should be made using a cost benefit analysis – what are the costs of the asset and will the cost change over time. The new standards empower companies to take a look at their lease portfolios and be more transparent with them. Additionally, the new standards could make it easier to lease than ever before.
There is no end-all be-all answer to the lease versus buy debate. For some companies, purchasing an office space is more feasible and considered an asset. For others, a lease makes more sense for their business growth, as it is often easier to renegotiate a lease. Deciding when to lease or buy is never an easy feat, but the information above can help you and your team make an informed choice. Whether you’re thinking of leasing or buying equipment or real estate, having the right knowledge and the right tools will help.