Become Your Own Landlord?
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Become Your Own Landlord?

Become Your Own Landlord?

Operating a franchise requires a lot of day-to-day decisions. One major choice that comes at the outset of owning the business is whether to lease or buy the space needed. There may be no one correct decision, but there are many factors franchisees can consider when determining their options.

After leasing locations for his first two Toasted Yolk restaurants, franchisee Cyril Thomas decided to buy the property for his next two locations himself. Building equity in an asset made more sense than forking over rent money to someone else.

“After you lease the 5,000-square-foot space and you continually are writing checks for $20,000-plus, you’re thinking, ‘Wow, that’s a lot of eggs,’” he says.

Thomas and others admit the decision to own the property is not for everyone. For franchisees deciding whether to own or lease their space, there are pros and cons to each scenario.

Leasing means lower up-front costs and less capital tied up, which can enable franchisees to grow the number of units they have more quickly. There also are more leasing options available—often at the most desirable commercial sites—which increases the chances of finding prime locations that best match an operator’s needs.

Alternately, lease payments go on during the lifetime of the business, meaning a site can cost more in the long run. While buying real estate requires putting up significantly more money initially, franchisees are paying for space they’ll eventually own. It’s an asset that can appreciate in value. And there are tax breaks for interest and depreciation.

In addition to the standard financial advantages and disadvantages to leasing versus buying, there are other situational factors as well. For Thomas, it took about six months to settle on a piece of property, followed by a multitude of permits and licenses to secure while dealing with engineers, architects, builders, and inspectors.

“Building has its own set of issues and a completely different timeline,” Thomas says. “We were supposed to open in 2023. We had to push it to 2024 just because the process is a little bit longer than anticipated.”

After it is built, Thomas can lease out extra space for an extra profit and eventually sell it years later for a higher price.

“That’s an incentive for me because I know if it takes me $1 million to build it, once it’s fully leased out, I could probably sell it for $3 million-plus, including the land value,” he says.

As with any topic involving real estate, location becomes critical. The more developed an area, the harder it is to find a good piece of land. Good locations also come at a premium price. Dustin Mullis’s company, Coup Management, owns the real estate for four of its metro Atlanta Zaxby’s restaurants, as well as for one under construction. At its two other Zaxby’s locations, the company secured ground leases.

Although Mullis sees clear advantages to buying the property instead of leasing it, he also believes there are definitely times when it is better to lease. That may be especially true in the restaurant industry, which places an added value in having convenient locations in strip malls or by major roadways.

“So you should always choose the best piece of real estate,” says Mullis. “If that piece of real estate can be bought, great. But the right decision, as a restaurant operator, is to always choose the right site, regardless of owning it or leasing it.”

Franchisees should take into consideration their experience and plans for the future as well. New franchisees may be best served building a strong foundation for their business and getting it off to a good start. If their business struggles initially, the last thing they need is to have the additional burden of the expensive building cost. Owning may not be the best route for franchisees looking to expand quickly.

There is no easy solution or one-size-fits-all recommendation for the question of buying versus leasing. Much like franchise research, financing, and site selection, franchisees must do their due diligence when it comes to making the right decision for them.

The full article about how franchisees decide between buying and leasing their properties can be found in Issue 4, 2023, of Franchise Update magazine HERE.

Published: June 20th, 2024

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