Playbook: Lease vs. Buy Your Property

Why This Decision Matters

For many small businesses and nonprofits, deciding whether to lease or buy space is one of the biggest financial choices you’ll make. After payroll, your facility costs are usually your largest expense. Get it right, and you’ll set your organization up for stability and growth. Get it wrong, and you could tie up too much capital, lose flexibility, or face unexpected costs.

This playbook walks you through the process step-by-step. By the end, you’ll have a clear framework to evaluate what’s right for your organization—now and in the future.

Step 1: Define Your Organization’s Needs

Before you crunch numbers, start with clarity on what you actually need from a space.

Key questions to ask:

• How much space do we need today?
• How fast do we expect to grow (or shrink) over the next 3–5 years?
• Is location critical for visibility, accessibility, or prestige?
• Do we need specialized buildouts (labs, kitchens, manufacturing lines) that are costly to replicate?
• How important is flexibility if our strategy shifts?

Pro Tip: Write down your “non-negotiables” (must-haves like square footage, parking, ADA compliance) versus “nice-to-haves.” This prevents you from being swayed by an attractive property that doesn’t actually fit your mission.

Step 2: Understand the Lease Option

Leasing gives you access to space without tying up major capital.

Advantages of Leasing:

• Lower upfront cost (security deposit vs. down payment).
• Flexibility to relocate or expand at lease end.
• Landlord typically handles structural repairs and building systems.
• Easier to budget in the short term.

Risks of Leasing:

• Rent escalations can outpace revenue growth.
• No equity buildup—payments don’t create an asset.
• Limited control over the property (restrictions on alterations, signage, or use).
• Exposure to landlord’s financial stability.

Rule of Thumb: Leasing often makes sense if your growth path is uncertain, you need to preserve cash, or your industry is fast-changing.

Step 3: Understand the Buying Option

Purchasing gives you long-term control and the ability to build equity.

Advantages of Buying:

• Build equity over time—your payments contribute to an asset.
• Fixed mortgage payments can provide stability vs. rising rent.
• Freedom to customize space without landlord restrictions.
• Potential tax benefits (depreciation, mortgage interest deductions).
• Ability to lease unused space to generate revenue.

Risks of Buying:

• High upfront costs (down payment, closing costs, due diligence).
• Ongoing maintenance and repair obligations.
• Less flexibility if your space needs change.
• Exposure to real estate market risk (property value fluctuations).

Rule of Thumb: Buying often makes sense if you have predictable space needs, stable cash flow, and want to invest in an asset for the long term.

Step 4: Build the Financial Comparison

The numbers often tip the scale one way or the other.

What to include in your analysis:

1. Leasing Costs
   • Base rent
   • Common area maintenance (CAM) charges
   • Utilities, insurance, and taxes (if not included in rent)
   • Rent escalations over lease term
2. Buying Costs
   • Mortgage payment (principal + interest)
   • Property taxes
   • Insurance
   • Maintenance & repairs (rule of thumb: budget 1–2% of property value annually)
   • Opportunity cost of down payment (what else could that cash do?)
3. Exit Scenarios
   • At the end of 5–10 years, what’s the residual value of owned property?
   • What are renewal options or exit costs for leasing?

Checklist for Financial Modeling:

• Project cash flows for at least 5 years.
• Adjust for likely rent escalations vs. mortgage payment stability.
• Factor in property appreciation or depreciation.
• Stress test: What if revenue falls short—can we still cover the costs?

Step 5: Factor in Strategic Considerations

Numbers alone don’t decide the issue. Your mission, growth plans, and risk tolerance also matter.

When Leasing Aligns Strategically:

• You’re in a growth phase and need flexibility.
• You operate in a fast-changing industry.
• Your location strategy may shift (e.g., retail moving online).

When Buying Aligns Strategically:

• You want long-term stability in a specific market.
• You have specialized facility needs.
• You’re investing in your balance sheet for future borrowing power.

Decision Framework:

• If flexibility > stability → Lease.
• If stability > flexibility → Buy.

Step 6: Conduct Due Diligence

Whichever route you lean toward, diligence is critical.

If Leasing:

• Review lease clauses carefully (renewal, assignment/subletting, operating expenses).
• Benchmark rents against similar properties.
• Clarify responsibility for maintenance, utilities, and capital improvements.

If Buying:

• Hire an inspector for structural, mechanical, and environmental checks.
• Review zoning and land use restrictions.
• Get a professional appraisal.
• Evaluate financing options (SBA loans for small businesses, tax-exempt financing for nonprofits).

Step 7: Make the Decision (and Revisit Regularly)

Your lease vs. buy decision isn’t permanent. The right answer may change as your organization grows.

Framework for Decision:

1. Does it fit our space and mission needs?
2. Do the numbers make sense over 5–10 years?
3. Does it align with our strategy (flexibility vs. stability)?
4. Are we confident in the risks we’re taking on?

Pro Tip: Even if you lease today, revisit the buy option every 3–5 years. Markets shift, cash flow changes, and opportunities arise.

Case Example: A Nonprofit’s Decision

A regional nonprofit serving children leased office space for years at $20/sf. When their landlord sold the building, rent was set to jump to $26/sf. They compared:

• Lease renewal: $26/sf, total occupancy cost $260,000/year.
• Purchase nearby building: $2.5M purchase price, $500K down payment, $140K/year mortgage, $60K/year taxes/insurance/maintenance.

Outcome: Buying increased their upfront cash outlay, but reduced annual operating costs by $60K, gave them control of their space, and allowed them to lease unused floors to another nonprofit. Over 10 years, the purchase created significant equity and cash savings.

Conclusion: Key Takeaways

• Leasing offers flexibility and preserves cash.
• Buying offers control and long-term equity.
• The right choice depends on your growth, stability, and mission priorities.
• Always weigh both the financial model and the strategic fit.
• Revisit the decision regularly—today’s answer may not be tomorrow’s.