Buy or Rent?

Whether it's a family home or a full on business don't forget the value of the assets you or your businesses live in.  You miss an opportunity if your landlord is the person making money out of the upward revaluation of properties.  This gives me a bias towards buying property assets rather than renting – even including warehouse space.

Buying normally makes sense on the profit and loss account since the outlays to put capital in and borrow are less than the rents landlords charge.  It stands to reason – they have to make a profit on top of the running costs of the property.  If you buy you get that profit and the capital appreciation.  Another point, when a company goes into administration I buy the premises from the receiver: since, incidentally, banks don’t have a clue about the proper valuation of properties there’s opportunity there perhaps to buy at below market value.  In the property boom recently ended, a lot of businesspeople made more money out of the business premises they had bought than they made out of the businesses they were running inside them.
Generally speaking I can work out the financial results of doing a deal in my head.  OK, it’s not accurate to five decimal places but a quick piece of mental arithmetic normally tells me what I need to know.  Buying properties can be an exception to that rule and I think it makes sense to get into the nitty-gritty of return on investment calculations if you have a complicated decision to make.

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Tip from Shaf – Calculating return on investment

Suppose you need a shop for the next stage of your business development.  If you do want to make a decision based entirely on finance here’s how to do it.  Assume for the moment that all other things are equal; you will sell the same amount of goods from the shop however you occupy it, owner or tenant.  Now make a five-year cashflow of the outgoings involved for each method.  Get the insurance side right and the rates and other expenses.  Now discount the cashflow for time and arrive at the net present value of the two methods and decide on the better of the two.  If you don’t know how to do this, get your accountant to show you and don’t leave his or her office until you can do it – it’s the only sensible way to measure financial return on investment and an absolutely essential skill for someone building a business.

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You will easily find people to argue the opposite of what I just said.  So let’s balance the ‘always buy’ view with a look at a different situation.  A businessperson was trying to build a series of pubs and clubs in a town that had recently opened a second university.  He much preferred to lease the premises because then he could use any extra cash that he had as a result of that decision to get into the next premises and so on.  To get rapid growth, he had to make the best use of his capital so leasing made sense to him.  He leased the pubs, filled them with students and sold the chain as a popular and growing concern.

Consider the buy or rent decision carefully but lean towards the buying side.