What is the optimal solution- leasing or buying a warehouse?

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by Admin  20   Feb, 2019

What is the optimal solution- leasing or buying a warehouse?

There is never going to be a 'right' or 'correct' answer to this question. Each business will have it own unique needs that need to be catered to in its own way. This puts a flag on the question asked in the title. Before we tackle this situation let us dive right into the concept of warehouses as a whole. We can primarily make the following bold statement: "The current trend is to shop online." Nobody wants to go to a store nowadays as people prefer to sit under his or her roof and order stuff online. The products that are coming from e-commerce sites will essentially need a place to be kept at, right before being delivered to the customer. That is where a warehouse will come into the picture. This automatically suggests that, for a business to run successfully, it will be more profitable to have a warehouse or a distribution center in the picture instead of setting up a store. Since the importance of storage space for businesses is ever increasing, the availability of warehouses will go onto the costly side, especially in terms of rent.

Any prior knowledge of our country's agricultural sector will also help in highlighting the importance of warehouse. Thanks to the Green Revolution, India has now got an abundance of food supply. From being an importer of food, India went on to become the producer as well as an exporter of food grains. This meant that all the food grains that were being produced had to be stored at places before being distributed to the public or to the government. This would also solve the issue of rotting of food grains in godowns. To prevent all this, and to put in a connector in the leaky supply chain, warehouses/cold storages have been glorified. Warehouses can be of different type, size as well as capacity. The type of customer (business) that approaches the warehouse owner will depend wholly on the capacity of the warehouse.

An individual who is trying to get into the business of owning a warehouse and then giving it on rent to businesses will always have to have certain clear points in their mind. He/she (let us say that this hypothetical individual here is a 'he' to simplify the article!) will have to make sure that the land to build the warehouse is sturdy and self-owned. The warehouse should also be in close proximity to a pucca road or highway. This ensures that the trucks and other heavy vehicles can easily come and go. Electricity is another important aspect that needs to be taken care of before providing storage facilities to business/clients. The site of the warehouse should also be safe. Appointment of watchmen and installation of CCTV cameras on site to will be of utmost importance since this will ensure the safety of the goods, goods that belong to another party/company.

A warehouse will always witness incoming and outgoing of goods. This means that workers are needed to be appointed to carry the goods to and from the warehouse to the trucks. With the improvement of technology and introduction of mechanization and automation of material handling services, things have become much easier. Responsibility and marketing of business are the only aspects that the owners will have to essentially focus on.

Coming to the question of whether a business should opt for renting/leasing out a warehouse or buy it outright instead, there will always be some pros and cons to any kind of decision making in a firm. Taking the two aspects separately:

WHEN HE WANTS TO BUY:

When an individual decides to buy the warehouse instead of renting it he is must have had a very detailed conversation with his financial advisor or accountant. Only when there is an abundance of funds will the individual even think of investing such a large amount of money on real estate. It can be said to be a one-time investment which will earn profits in the future. Buying will always lead to possessing some amount of control. If he buys the storage facility then he will have ample control over the working of the place. He might also get an added advantage of tax deductions from the government since he spent a huge amount on purchasing it. Another advantage is that the property can act as a guarantee or as a valued equity of the company while attracting clients. This automatically assigns greater value to the company in terms of its assets. Leasing off the surplus area not needed by the owner himself to another business entity will earn him monthly income in the form of rent. A newcomer in the business will not be able to put up with the funding requirements as well as other obligations necessary for owning storage spaces. Those funds have the opportunity to gain higher returns elsewhere. Upkeeping and maintenance charges of these warehouses may, however, be pretty high, making its purchase a nonsensical deal. An established company, on the other hand, will have the full potential to make payments in order to buy storage spaces. A major disadvantage of buying the warehouse is that it becomes difficult to relocate to a more convenient space as and when the business grows. Selling the storage area will be all the more difficult since the market for purchasing used areas is pretty dull.

WHEN HE WANTS TO LEASE:

Leasing or renting is an ideal solution when the warehouse is situated in a prime location. This will enable the business to shine with efficiency. A wider array of choices lie in front of the individual when he opts to rent a warehouse instead of buying it. The array of choices may differ in size, type, location etc giving him an opportunity to select the warehouse according to his unique needs. The burden of maintenance is erased as and when the individual makes an effort to go ahead and rent a warehouse. Since he is not the owner of the facility, he is relieved from maintenance duty. He also has lesser or no control in the facility since he is just a tenant. Renting should be an option only when the cash flows of the business are frequent and smooth. Without frequent income, it becomes difficult to keep up with monthly or even annual payment of rent. However, there is a chance of witnessing annual increases in the amount of lease, which might take calculations regarding the costs of the business for a toss! Relocation becomes an easy affair while under a lease. Any change in the needs of business might lead to a change in the storage facility used currently. As and when the business grows, there may be upgradation in the area needed as the storage facility.

In conclusion, it is always important for the business to figure out what its exact needs are. Buying and renting will always be known as two sides of the same coin. It depends completely on the needs of the business as to which side of the coin will give them greater efficiency as well as profits. Also, to find a tenant who is in search of the exact same things as what the business (warehouse owner) provides is a whole other situation.

https://www.nextlevelstorage.com/blog/pros-cons-of-leasing-vs-buying-a-warehouse-facility/ https://edgeviewdirect.com.au/buy-or-lease-a-warehouse/ https://blog.shelving.com/warehouse/renting-vs-buying-a-warehouse-the-pros-and-cons/ http://www.ruthvens.com/buying-vs-renting-warehouse-best/