Ownership: Mandatory or Overated?

A wealthy friend of mine once told me “ if it flies or floats, rent it.”  He was implying that the idea of owning something that’s use was as infrequent as an airplane or a yacht was much more tolerable from an economic standpoint if one only paid for the actual time one used it.  It made sense to me.  That’s probably why he’s rich and I’m not.

So does this apply to one’s business as well?

The single largest barrier to entry into the traditional, commercial pet care business is the large, upfront capital investment required to either purchase or construct a facility.  This is why there isn’t a pet care facility on every corner like Starbucks.  Properly designed and constructed pet care facilities of any size easily cost upwards of one million dollars and larger ones can often exceed that by many times.

One solution to this problem has been leasing and modifying an existing building.  While this eliminates a portion of the upfront capital problem described above, it creates some others that deserve serious consideration.

When one enters into a lease (or rental) of property, the specifics of the transaction are outlined in formal legal documents.  Unlike outright ownership, these documents are limited in the amount of time they are in force.  In other words, the process of negotiating the cost of leasing/renting will need to be repeated on some regular basis as outlined in the lease.  This is important to the business owner because it means that they do not have long term control over the cost of occupying the building.  When market rental rates go up, landlords raise tenants’ rents accordingly.  That means that the business is going to incur an increase in expenses which directly affects the profitability of the business.  This is the major trade off of leasing versus owning: you are not in total control of the cost of occupying the building.

Another important factor to consider is the startup and operational financing required for most businesses.  Unless you have a substantial amount of cash on hand and are going to write a check for all the business expenses, you are probably going to need some sort of financing.  To obtain a business loan, banks generally require some sort of security.  The one they prefer and are able to offer their best loans for is real property (real estate).  They figure if you default on the loan they can take the property and sell it to pay off your debt.  If you are leasing/renting a facility, you will not have the ability to use the property as security for a loan because you do not own it.  While there are “un-secured” loans available in marketplace, due the higher level of risk to the lender, the rates are higher than secured loans and they can be difficult to obtain.

It is important to make sure the numbers work and that your business makes economic sense.  Knowing this prior to diving in to a new venture will often make the difference between success and failure.

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