Whether to buy or lease your hostel is a question that consistently comes up on the Hostel Management forum, Facebook group, and in general conversation. There’s a LOT to consider when making this decision, and no two situations are the same.
To help you navigate these tricky waters, I have gathered some of the most important information I’ve found and collected it in one spot. Due to the sheer amount of information on the topic, this is split into 3 blog posts so that you can read what you need or is relevant to you.
What you will find in each blog post:
- Part 1: Buying vs. Leasing 101: Pros, Cons, Factors to Consider
- Part 2: Types of Leases & Change of Use Permits
- Part 3: General Points for Buying vs. Leasing
NOTE: These posts are in no way comprehensive, or should be taken as any type of legal advice. I have very little direct knowledge on the subject, but have gathered information from our members via the forum and shared their experiences and insights, along with my own research and lessons on the topic. Feel free to comment on anything that you feel is missing, or is not correct. This is how we collaboratively learn!
So, without further ado, Buying vs Leasing 101:
- Building equity and making a long term investment
- Stability & control- little to no risk of losing your space or having it taken back by the landlord after you have improved it and increased the value
- Fixed loan/price- no possible rent increases
- Ability to rent- if you have a big building you can rent to other tenants in addition to the hostel for extra amenities (bar, restaurant) or simply for extra/supplemental income
- Possible tax benefits
- Lower monthly payments
- Requires less money to begin- buying requires substantial capital for a down payment
- May not require as good of credit as a mortgage would
- Can potentially get a prime location for less money
- Can use proven business model to finance buying later
- Less risk & liability for the hostel owner
- Flexible, less permanent in nature
- Possibly better tax benefits- may be able to deduct the entire amount of your lease payment vs. just the interest on a mortgage payment (depends on your country/city)
- Often more properties available to choose from
Factors to Consider
This list is in no way exhaustive, but should get the wheels turning:
- Your available capital and/or access to credit
- The amount of risk you are comfortable with
- The length of time you want to be involved with this hostel
- Price of the property vs. the lease contract
- Maturity of mortgage- when it must either be paid off or renewed into a new term
- Type of lease- gross, net, ground, lease to own, etc.
- Terms of the lease: for ex. an empty space vs negotiating the redesign into the price (adding bathrooms, etc)
- Living on or off site- are you paying a separate rent/mortgage?
- Who's responsible for the maintenance work of the property
- Will you have to do a Change of Use permit?
- Will you outgrow your space?
Length of Stay- the Breakeven Point
One of the big factors to think about is how long you want to stay in your current location. This is not only in regards to flexibility vs stability, but also can drastically vary your costs.
According to a detailed analysis on commercial real estate property for sale by fitsmallbusines.com, buying commercial real estate is a better option than leasing if you plan to stay in the same location for 7 or more years. Otherwise if you plan to move sooner, then leasing is probably a better idea. Their reasoning:
“We found that over a 15-year occupancy period, leasing commercial real estate costs as much as 86.6% more in our example than buying commercial real estate. However, when the expected occupancy period drops from 15 years to 7 years, the cost of leasing is actually less than buying commercial real estate. This makes 7 years the “breakeven” point for buying vs. leasing.”
What other information do you have about buying vs. leasing a hostel? What has worked for you, or what has presented major roadblocks? Sign in and comment below.
**I know many of you comment on these blogs on the site's FB page, which is great, but it would be even better to have the comments directly on here for everyone to read. Thanks for your input and helping to further our knowledge.**
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Info for these 3 posts comes from: