Should you Buy or Lease Office Space?
Advantages of Buying
When you choose to buy, there are a number of financial benefits.
- You can build equity. Your down payment and monthly payments will help you do so. Mortgage payments will be steady if you get a fixed rate loan, so you won’t have to worry about rent increasing.
- There are tax benefits, such as being able to deduct interest payments, property taxes, and building depreciation. Your property might appreciate, but this is subject to inflation and supply and demand.
- You can potentially rent out extra space to other businesses as an additional, passive income, and eventually, you can sell the property to fund your retirement. On top of all of that, you won’t have to answer to a landlord, so you can make any changes you like, as long as they comply with local ordinances.
Disadvantages of Buying
There are drawbacks to buying your office space.
- It can be costly. Just during the buying phase, you’ll have to put forward a down payment, as well as closing, appraisal, and other real estate fees. All of this can cost you up to hundreds of thousands of dollars right up front, and for some businesses, this can be a major drain on capital and cash flow. And that is all if you qualify for financing to begin with, which can be difficult. Then, you have insurance to think about, including liability as you’ll be responsible for on-site injuries.
- When you own the property, you’re responsible for any repairs and maintenance, and if you wish to remodel, you’ll have to foot the bill for that. The costs associated with buying and maintaining a property mean you may also have to sacrifice other opportunities that you could have otherwise used that money for.
- If you pay your loan back too early, you will likely be charged fees for doing so. You also face loss of capital in the chance that your property’s value decreases and you need to sell. You may need to sell if your business outgrows the property, or you may even stifle potential growth by resisting moving to a bigger place.
Advantages of Leasing
- On the positive side of leasing, there is only a small financial commitment at the beginning. You can avoid the down payment and real estate/closing fees, though you may have to pay a security deposit. Ultimately, you’ll have less money tied up in the transaction so you’ll be able to use that money for other things.
- Lease payments are tax deductible, and you’ll not be responsible for repairs and maintenance in most cases, so you’ll know what your monthly expenses will be without having to worry about extra costs. You’ll have more financial flexibility as a result, which can be especially helpful for a new business.
- You will be beholden to a landlord, but this isn’t always a bad thing. They will likely take care of repairs and maintenance, freeing up your own time and money, and they may even remodel for your needs if you reach a deal with them. Some landlords also pay for utilities and even cleaning services.
- You can potentially set up shop in a more ideal area than if you were buying, due to affordability. It will also be easier to leave if you outgrow your location, your business closes, or you wish to move for any reason. In general, you may be able to better focus on your business by avoiding issues that come with ownership.
Disadvantages of Leasing
- Your rent is likely to increase when you renew your lease. As time goes on, this can become burdensome. Rent payments are typically larger than monthly mortgage payments to begin with. You will also miss out on the advantages of equity and property appreciation. You won’t be able to earn passive income by renting out space the way you would if you owned the property.
- Beyond the financial factors, there are also disadvantages associated with having to answer to a landlord. You will be reliant on them for repairs and there’s no telling how quickly or well these will be taken care of. You’ll also have to comply with any rules they set forth. Even if you like your initial landlord, they could sell the property, and you may find yourself dealing with a different one in the future.
- If your business fails while you’re renting the space, you’ll still be responsible for paying rent or penalties. Your landlord may even decide not to renew a lease on their end, leaving you looking for a new place altogether.
Buying or leasing office space is a big decision that will have a major impact on your business. Be sure to take all of the above factors into account as you decide what is right for you.
Contact a Banker today to learn more.