Dear Dave,
I’ve operated my own small business for a couple of years. In that time, I’ve been leasing the building that houses my company. How do you know when the time is right to buy a place and stop leasing?
James
Dear James,
I’m a big fan of leasing the first few years after starting your own business. It’s even better if you can work out of your home, but I understand that’s not always practical.
In my mind, you should only buy a building when you have a good idea what your building needs will be from a solid track record. Growth is a good thing, but in some cases you may want to hold off buying a building if you’re growing too rapidly. Don’t make the mistake of focusing too much on real estate and not enough on generating revenue and managing your growth intelligently. You would also want to make sure you’re going to be in anything you buy for a while, because you don’t want to be stuck with a residual value. A residual value is the remaining value of an asset after it has been fully depreciated.
In the first three to five years of starting your business, you should lease. After that, you can choose to lease with an option to buy or, in the right situation, buy a building — debt-free, of course.
—Dave
