Leasing and Buying Difficulties - Essay Example

Vivek Lahoti 10th December 2008 Leasing Vs Buying "I felt sick to my stomach. I couldn't believe it was happening to me. It was really like a nightmare. I had built the best variety store in the whole region and worked hard in the community-done everything right-and now I was being kicked out of town. It didn't seem fair. I blamed myself for getting suckered into such an awful lease, and I was furious at the landlord." (Tedlow, par.11) This is how Sam Walton, the founder of Wal-Mart, reacted when he was thrown out of his Front Street store in Newport because his lease agreement didn't have a renewal clause. This incident Mr. Walton couldn't forget till his grave. It also pictures the dilemma in everybody's mind when it comes to taking a place on rent. So, why would anybody rent Definitely, it feels great to own something. Unless you own something, you can't be happy having it because you always fear that it could be taken away. Every man dreams of owning the world. But, how much can you own and can you handle the hassle of owning everything. Sometimes you have to have a logical thought about what is more important - owning things or just being able to use them. Small Businesses: Let us analyze from the point of view of a small business what is good for them. All new small businesses generally start from a relatively even smaller scale. Until the business is not set, the risk factor associated with it is high. So, initially the focus is on keeping investments in the business to what ever is essential only. The owner has to keep a backdoor for himself so that in case things don't work out fine, he has a way of exiting with minimum losses. Because, when the time comes to "Establish the liquidation value of your assets" (Cavanaugh, step 4) you rarely get a fair price. According to the U.S. Small Business Administration, "Generally this amount is at least 20% less than its retail value." Also, initially most of the liquidity is sucked up by the core activities of the business. As such, even if the owner of the business wants to own his premise, he cannot afford it. He is forced to rent. So, as long as the location of the business is not all that important (like in the case of small factories or offices) it makes more sense to rent, since even if they have to relocate, it's not very difficult and it doesn't affect their customers much. According to Dratch "Taking your company from Point A to Point B may seem at first to be a simple matter of "get up and go," but if you plan ahead, you will get it done without too much trouble." (Dratch, par. 1) But as the business grows old (as in the case of most mom and pop businesses), it becomes more stable. Or even initially, if the location of the business is very important, like in the case of a small shop, re-location becomes a hassle. So, it makes sense to buy your own property instead of paying rent. If you own your space, it also gives a sense of belonging. You know that it is yours and no one is going to ask you to leave from there. You take more efforts in planning it, furnishing it, decorating it and incase you need to change anything, like even pulling down a wall to make more room, it's totally upon you. It gives both, mental as well as physical stability. Large Businesses: Large businesses have their own way of doing things. Being usually tied down with their bureaucratic inertia, they have to fix their policy once and once fixed, they have to follow it. Either they buy the space or they rent it. They usually do not prefer to rent in the beginning and buy later. They usually will just follow their policy. The concerns of big companies are not very different when it comes to premises. Usually big industries and corporations will prefer to own their premises. This is because relocating a big industry is not easy. Finding a similar huge place, with all the necessary approvals and facilities is most difficult. Since most of the equipment or machinery is tailor made and huge, it's impossible to relocate. And even if they try, the cost is exorbitant and the time it would take would create havoc. Buying the place usually becomes cheaper than relocating to a new place. Also, the processes are set, everyone knows what he/she is supposed to do and how. After relocating, everything needs to be done from the scratch. The stability is completely lost. Again, there are some other types of big businesses which think otherwise. Like in case of many customers oriented businesses like banks, malls and restaurant chains. In such businesses, though the location is very important, the costs of the commercial premises at suitable locations are also very high. 'Own Smaller, Rent Larger' is a strategy followed by many organizations to cut overheads. Also, each individual unit is considered as an independent 'Profit Centre'. Following today's lean and mean business strategies they usually prefer to focus on their core business activities than invest in the space required. If a particular 'Profit Centre' is not working up to its mark (like cannot handle its own rent), they prefer to shut it down and move on. Being able to use the space is more important than owning it. If for what ever reason, a particular store or a restaurant is not able to do business like the way it was thought, why lose your head on it Shut it down and move on. Not that they never get the taste of their own medicine. As we saw already, Sam Walton was thrown out. Unlike small businesses, large businesses usually have to act very carefully when it comes down to renting. The duration of their lease is usually very long and the terms of agreement are drafted very carefully. Impact on Consumers: One way to decide whether to buy or rent would be by considering purely mathematical or economic factors. For example, suppose you purchase a car for say, $25,000.00. Considering, say 8% taxes on it, it costs you totally $25,000 + 2000=$27,000. So you waste $2000 on taxes initially. Considering annual depreciation on it to be 20%, you loose $5000 in the first year to depreciation alone. Considering bank interest rate to be around 8% on your landed cost, you loose $2160 towards interest. Considering you spend $1000 on maintenance, etc. you totally spent $5000+2160+1000=$8160 in owning that car in the first year itself. Now, if suppose you can rent the same car for $8160 / 12=$680 or less per month for the year, it sounds better to rent than to buy. There are many more factors which should be considered, like of course depreciation is always high for the first year. Depreciation can be claimed as an expense, thus helping you save income tax. But then, you save on sales tax by not buying the car and you can rent a new car every year instead of being stuck up with the old one for ever. Again, you cannot have a sense of belonging with a hired car. But you need not worry much about the hassles required in maintaining the car for too longAnd the argument continues. In case you want to buy a home, similar study can be done. In fact, there are many more new trends also that have come up, which provide an in-between way. I had come across an interesting article in a leading American newspaper which said, " would offer families the opportunity to rent a three-bedroom home with a garage and all appliances included. After a successful rental period, the homes would be sold to the family at a price that results in a mortgage payment at or below their current rent payment." (Rent-to-own homes, par. 3) I personally think it works well, since it has all advantages of a rented home, minus the tension of being ousted. You can have the pride of owning the place without the tension of thinking how to dispose it in case you are in bad need of money OR say, the property prices drop suddenly. But, the catch is, the rent in this case would definitely be slightly higher than the market. One very important observation which should be noticed is, where small shops would prefer to buy, large shops would prefer renting and while small industries would prefer renting, large industries would prefer buying their premises. To conclude, to rent or to own or to find a middle way depends totally on the circumstances and the way of thinking of each individual. Through this paper we can only put forth different arguments as ways of thinking. Everything has its own advantages and disadvantages. Summary It feels nice to own something than to rent for the very reason that it gives a sense of ownership and stability. But you should consider whether it is worth buying in case you won't need the place later. Small businesses, in their initial start-up stage have a high risk factor associated. Also, they cannot afford to buy space. So, whether they like it or not, they have to rent. But as business grows older and becomes more stable, they should prefer to buy space and avoid the relocation hassle. Large businesses, depending on the nature of the work and company policies decide whether to buy or rent. Usually, heavy industries prefer buying their premises because relocation is very difficult. While customer oriented businesses, like shopping malls, restaurants and banks prefer renting because in case they don't get proper customer response, they should be able to move out. While looking to own a house, as a customer, you should be looking into the pros and cons properly before making a decision. Works Cited Tedlow, Richard S. Sam Walton: Great from the Start. 23 July 2007 Harvard Business School Working Knowledge. 10 December 2008 Cavanaugh, Patrica Liquidate Assets. U.S. Small Business Administration. 10 December 2008 Dratch, Dana Business Relocation Checklist. Bankrate.com 10 December 2008 "City plans more rent-to-own homes." (Rent-to-own homes) 14 October 2008 BizTimes Daily. 10 December 2008 Read More