By Austin Hair, Leaders Real Estate
Should you buy, or rent, your location?
Like most good questions, the answer is – it depends.
The first priority is finding the right location for your business. It’s critical to have the right combination of demographics. You generally want to have high population density and less competition. Stay away from a place that’s saturated with other dentists. Within your trade area, find the locations that meet this criteria without getting too hung up on buying versus renting. Picking the wrong location could easily kill your business.
We usually recommend renting in high visibility locations. Even though it’s considerably more expensive to rent, a good way think about it is through the lens of cost of acquisition per customer.
For example, if your cost of acquisition is $200 per customer and you want 30 new patients a month, that’s $6000 per month in marketing expenses. If a high visibility retail location can also net 30 new customers, you could afford to spend up to $6000 a month in rent and break even. If you have a 3000 sf location, you could afford to spend $24/sf per year extra.
3,000sf x $24 = $72,000 in annual rent
$72,000/12 months = $6,000 extra in rent per month
However, the difference in a good location could cost much less than the marketing budget and still net the same amount of new customers.
In the next scenario, let’s assume everything is equal. You have two identical locations; one is available for rent, one for sale. You think, “I’ll buy. I get a good return on my investment and I’m diversifying.”
Not necessarily. First, the value of your building is based on the tenant. It is not like residential real estate where it’s 100% based on the location. Therefore, you don’t have diversification because the value of the building is tied to the success of your business.
If you have a high conviction in that area and you think the value is going to go up over time, then it might still be a great investment.
Another consideration is the allocation of capital. Every business is constrained by the amount of capital they have. If you have one location and plan on scaling to 2, 3, 10, even 30 locations, then you’re going to be limited by the amount of capital and debt you have. If you don’t plan on expanding, then it makes more sense to buy the real estate and own it indefinitely.
For commercial real estate, you’ve got to put down 20% to 30% of the purchase price as the down payment. That cuts into your ability to scale. Real estate often gives safe returns between 8% and 20% annually, but what do you get when you invest in your business? It could be 30% to 50%, sometimes even 100% or more.
If the perfect location is only available for purchase, partner with a group that will buy it on your behalf and lease it back to you. There are several groups that do this, including Leaders Real Estate.
Ultimately, you’ve got to ask yourself, “What am I trying to do long term?”
Leaders Real Estate is a Commercial Real Estate brokerage specializing in Tenant Representation. Over the years, we’ve noticed the lack of support businesses have in identifying the right location for their business. We’ve developed tools that can help small and large businesses alike in providing the numbers behind the “feeling.”