Lease or Buy an Office?

Most small businesses need to decide whether to lease space or buy an office. No matter the type of business you have, the choice typically comes down to location and finance. For instance, if your business’ success depends on the foot traffic in a specific neighborhood – available locations may make the lease vs. buy decision for you. In addition, whether you can purchase or simply lease space will depend on the capital and financing you have available.

Leasing space

Leasing is a practice answer for many small businesses. It’s flexible, simpler and tends to be more affordable. It frees up working capital and can give you access to a great location. Leasing can offer several advantages:
  • It can free your working capital. Consider briefly what it would be like to own commercial real estate, along with committing to a sizable mortgage. Rather than tie up your money that way, you could be more flexible or financially nimble, and better able to use your money for other things.
  • It can give you access to advantageous locations. If you need a retail space in a well-trafficked area, or you’d like to be located in a building that has either cache or critical amenities, leasing may be your best option.
  • It can help you focus. You can run and grow your business, rather than deal with the headaches that come with ownership.
  • It can be financially easier in the short term. This is especially critical to a small business’ survival if you’re just starting out.

Drawbacks to leasing:

  • You could face rent increases each year.
  • You will not build equity.
  • You have less stability. For example, your landlord could decide to use the property in some other way and choose not to renew the lease. This could mean losing your location and the hassle and expense of moving your business.

Buying an Office

The advantages of owning include fixed costs, tax deductions, and potential long-term savings.
  • Lock in your costs. A long-term commercial mortgage can give you fixed costs, making it easier to plan financially and potentially leading to long-term savings.
  • Establish a stable location. Beyond stabilizing costs, buying could also mean that you have greater confidence that you will remain at your chosen location for as long as you want.
  • Tax deductions. Owning and operating commercial property can allow you to take tax deductions on mortgage interest, property tax, and other items.
  • Extra income. You might be able to receive another stream of income by renting out unused office space.
  • More cost effective over the long term. This includes building equity by paying down the principal and having the property appreciate in value.

Drawbacks to Buying:

  • Tying up resources. Much of your financial resources over the long term may go to your commercial mortgage.
  • Unexpected costs. As a growing business, you could face unanticipated costs – such as upgrades to building infrastructure or major repairs.
  • Limiting growth. Being locked into a space may limit your options for expansion. As your business grows, you might need to expand your office space to accommodate more employees, or expand your space for inventory. If you own a facility, you won’t be able to simply move when your lease is over.

Game Plan

Your decision to lease or buy depends on your need for a particular location, the properties available in whatever location suits your business and the financing you have available. Consider each of these thoroughly; discuss them with your business partners, advisors, and attorney and accountant.
  • Consider both the short-term costs and benefits and the long-term advantages and disadvantages of each scenario.
  • Consult your accountant, financial advisors, and attorney.
  • Carefully review any legal documents pertaining to either leasing or buying.
  • Consider the cost of and the need for insurance.
  • Do a cash-flow analysis. Compare your net cash flow from leasing versus purchasing. To determine after-tax costs of either alternative, you’ll need to know closing costs, lease terms, your income tax rate, the period of depreciation based on the property’s expected full life to your business, estimated value of the asset, and your cost of capital.
  • If relevant, consider whether real estate values are appreciating or declining.
  • Consider your creditworthiness. If you can’t qualify for a mortgage, that could limit your options.
  • Take into account non-financial considerations. For example, would you want to make renovations to a property? How important is it to you to secure a particular location and know that you’re not dependent on a landlord, who might change his or her mind regarding future lease renewals?
  • Read articles that provide perspective on whether to buy or lease an office, such as:
  • Research specific opportunities you might have for leasing or buying office space.
  • Think about which solution best suits your situation today and a few years from now.
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