Should You Make Or Should You Buy

When an entrepreneur wants to join the hotel industry, he can search for a property company for a building for lease to operate his hotel rather than to build it by his capital.Nowadays, there are so many hotel chain do not own the buildings which contribute the hotels, such as Choice Hotels International company, which own 11 hotel brands: Comfort Inn, Comfort Suites, Quality, Sleep Inn, Clarion, Cambria Suite, MainStay Suites, Suburban Extended Stay, Econo Lodge, Rodeway Inn, and Ascend Hotel Collection has 6,600 hotels under franchising (Stephen P. Joyce, 2012). In economic theories, the advantages of outsourcing the hotel building is to provide a use of the building with a lower cost and reduce the barriers to entry and exits for firms in the market.However, a lease may bring some problems in the long run such as the control of the property, the increasing in fixed cost and the ownership. Advantages Of A Lease Cost of production theory of value Firstly, leasing a building helps the hotel owner reduce all the costs of production include fixed costs, variable costs, and sunk costs. Land cost is usually a large component of the fixed expense (Valentino Piana, 2013). By renting a building for the hotel the expense recording annually could be decreased in the same year if the owner build the hotel building.In addition, a lease can help to cut down some variable costs because it’s considered that the tenants pay for the rents, and the landlord pays for the maintenance, taxes, and insurances costs of the building. The hotel owners can also reduce the sunk costs of decoration and furnitures of the building in case that they lease an old hotel building. Therefore, the business can save money for some activities that help increase the revenue such as provide better services, invest money on marketing or create events to attract the customers.A firm’s strategic flexibility “The allocative function of price cannot operate unless firms can enter new markets and leave existing ones at will” – Ben Bernanke (Principles Of Microeconomics, 2003). In this mobility world, renting can lower the entry and exit barriers for the hotel investor. A poor capital can be a difficulty to a firm to enter a given market. At the beginning, a lease helps an entrepreneur start the own hotel business with a low capital and lessen the risks of build a hotel with large amounts of money.In contrast, high investment in the property is a component of barriers to exit when the firm wants to leave the market. In the long term, the hotels may need to be upgraded or go bankupt, and the owners do not need to worry about selling or leasing the hotel building if they do not make their own investment. Long Run Leasing’s Main Concerns However, there are many unexpected things that firms have to concern when they rent the buildings, and the first problem is the right to control the building. Obviously, there are no perfect properties for lease that suit the business.As a result, the firm may want to change some facilities to fit the hotel concept. If a firm rent the facility, it has to have the permission of the landlord to make these changes. In the long run, the fixed cost can increase when the rental cost increase unexpectedly. The property investment market may change and landlords have to increase the rental price in order to earn their own profits. In addition, the market prices of electricity or water go up also lead to the raise in the rental cost. A purchase may be cheaper than a lease when firm can avoid paying additional fee in the long run.The last but not least problem when renting a building is the ownership. In the hotel industry, the property location is very important. Firms have to think about the own right of the hotel building when their hotels gain success in the long run because the landlord may want to take back the property to run the tenant’s business, or a competitive company can buy the building from the landlord with a high price. There is no need to worry about losing your business land when you have the own right. Conclusion There is an economic discourse between buying and renting a land to start a hotel business.As the explanation above, people should rent the building for the hotel at the beginning because it will bring the economic benefits such as low cost of productions, flexibility to enter or leave the market. However, when the hotels gain more profits and develop success, firms should think about the ownership of the buildings if they do not want to take the risks of losing the business land and paying extra money every year in the long run.

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