When deciding whether to lease or buy office space for your small business, it is not a ‘one size fits all’ approach. You need to consider your business goals, projected growth, and available capital to clearly establish what you can realistically afford.
Regardless of whether you opt to lease or purchase the perfect space for your small business, one thing is certain: investing in your dream office coffee machines will make the early mornings and long, stressful working days far more manageable.
Advantages of Leasing
There are many advantages to leasing office space for small businesses, but you must be willing to sacrifice factors like building equity and ultimate control over your facility. Leasing requires a low initial financial commitment, and lease payments are tax-deductible. The higher cash flow through your business can also improve your credit rating.
Landlords are responsible for all repairs and maintenance obligations, and in some cases, may also pay for specific utilities, such as waste management, water bills, or housekeeping services. Often, you can afford to lease space in better neighborhoods compared to buying, and you have increased flexibility to move once you outgrow the building.
Drawbacks
Although leasing property offers numerous benefits, it also has several drawbacks that should be carefully considered. Leasing office space means you are at the mercy of a landlord for the quality and speed of any repairs or upgrades that need to be conducted. Your landlord may also have strict rules regarding the use and maintenance of outdoor spaces, which may affect your ability to store essential materials and company vehicles.
If you use a broker to secure your leased property, you will have to pay an annual broker fee for the duration of your lease. This is typically a percentage of the yearly lease amount and is often negotiable. However, it is an additional cost that would need to be accommodated. Furthermore, rent is usually increased every time a lease is renewed, which could push it out of your price range.
Advantages of Buying
Purchasing property to operate your business offers numerous advantages that can add to your success down the line. Buying real estate allows you to build equity, which can be used as collateral to secure additional loans. Mortgage payments will stay steady, and monthly interest payments are tax-deductible.
Building owners can claim depreciation, and any changes you may want to make are entirely within your control. Furthermore, since you own the establishment, once you retire, you can sell the property and invest the proceeds in your retirement scheme.
Drawbacks
Similar to leasing, buying property does have a number of cons that need to be assessed before making a significant and costly investment. Naturally, there are considerably higher initial costs associated with purchasing property, including a down payment, real estate agent fees, and closing costs. Business owners need to consider whether this expensive investment could be better utilized to grow their business in other ways, rather than purchasing office space.
If you need to remodel, repair, or conduct vital maintenance, you will be solely responsible for covering the costs. Should you outgrow the space, you will need to sell the property, which can often be a lengthy and highly stressful task. Additionally, increases in property tax and interest rates can hinder your company’s cash flow, and property values may be lower at the time of selling compared to when you first bought the establishment, resulting in a financial loss.
Factors to Consider
There are several crucial factors to consider when deciding whether to purchase or lease office space for your growing business.
Budget
Arguably, the most essential factor to consider when looking for office space to rent or purchase is your available budget. Whether you opt to lease or buy, it is not just a singular transaction that needs to be covered, as both avenues contain additional costs that will need to be met over time.
If you are not currently in a financial position to purchase real estate in your desired location or property type, leasing more affordable office space can be highly beneficial. This approach allows you to create and achieve both short-term and long-term financial goals, ultimately securing the location of your dreams.
Local Rental Market
If your business is situated in a large urban area like New York City or Los Angeles, where rental prices are exceptionally high, it will often make more sense to purchase property, considering your mortgage payments may be equal to, or even lower than, your monthly rent would cost.
You could also consider investing in mixed-use properties, using retail space to operate your business from, and utilizing additional residential units for personal use or for rental income to offset costs.
Company Size
If your company is conducting healthy business and you anticipate rapid growth over the coming few years, leasing your office space will give you more flexibility to move locations should you outgrow your current premises. For a small to medium-sized business, waiting until you have achieved the kind of growth you are hoping for before purchasing space will ensure that you can accommodate a growing workforce and meet your operational requirements.
In comparison, should you purchase real estate, you may quickly outgrow the space or purchase more than you need, incurring additional and unwanted costs. This mentality should also be applied if you plan to downsize in the next few years as well.
Moving Potential
Multiple financial studies have shown that for short-term occupation, leasing is a far more cost-effective approach compared to ownership. However, if you are looking for property to establish your main headquarters for at least a decade or more, buying the office space will make more financial sense and offer added flexibility to convert and redesign the establishment to better suit your operating needs.
Furthermore, if you hope to relocate your business to a different city or even country, leasing office space will provide a flexible and temporary location to operate from until you can establish your desired location.
