Leasing vs. Buying Office Space: Which is Better?
[This article was written by Kaelee Nelson.]
If you’re on the market for a commercial space your business can call “home”, congratulations! It probably means that you’re ready to expand from your home office into a larger location in order to keep up with the demand of your recent success—and growth is always a good thing.
But your growth has to be scalable, because biting off more than you can chew is a sure recipe for disaster. Too many entrepreneurs come out of the gates, guns blazing, ready to pull the trigger on picture-perfect place… only to find that their sales forecast was terribly miscalculated and there’s not enough revenue to make monthly rent, or that the hidden costs for building owners drain the overhead budget before Q2 even rolls around.
Which is the better route to go? Should you save money on an affordable lease, or invest in the future by taking out a mortgage? Ultimately, it’ll all come down to the line of work you’re in, what your business needs, and the growth you envision over the next five to 10 years.
You might see green in your profit margins, but don’t let the lights in your eyes blind you from a bad decision. Follow these tips as you move into a new office space to (safely) set your sights on success.
The Benefits of Leasing an Office Space
● Barrier to Entry
Most business owners choose to lease simply because the option is far more affordable than buying a property. If your business credit is strong, qualifying for a lease will be significantly easier than qualifying for a commercial real estate loan. You could be able to lease a property that’s far too expensive to buy and leverage that ability to get into a prime location with a high image. Rental payments make it possible to get your foot into a hot real estate market, which could be essential to the industry you operate in.
When you enter a commercial lease agreement, it means you agree to rent the space from the property owner for a specified amount of time. Commercial leases typically run at least three years or more, but there’s usually room for negotiation. This lends business owners flexibility and allows them to find lease terms that suit their needs.
For example, you might need office space to support a nearby construction project with an estimated completion date in two years’ time. If the proposed lease terms do not fit your timeline, you could negotiate a shorter duration in exchange for higher rent.
Can’t move in until the new year, or see a similar space offered at a lower price? Discuss whether they’d be willing to waive the first month’s rent, or if they’d be willing to reduce the rental rate to align with the comps. Nothing is set in stone until you sign the dotted line.
Balanced books are critical to success, and leasing is much easier to budget for. Not only are rental payments generally cheaper than a mortgage, but you won’t have to pay for significant maintenance or repairs that can cost a lot of time, money, and attention. Focus on running your business—not the expensive invoices at Home Depot.
Also, you’ll enjoy more liquidity because you won’t need the cash for a large down payment and the required security deposit will be significantly smaller. This is especially beneficial to entrepreneurs who are taking their startup to the next level because it provides a security blanket of cash reserves.
Lenders won’t care if you need a new piece of equipment, or the numbers don’t pan out quite right; they’ll still come knocking to demand repayment no matter the revenue coming in or expenses going out, tacking on steep interest penalties for each missed due date. It’s important to have a comfortable supply of cash on hand to stretch through dire financial straits should they arise, or you may have to tap into personal savings at the risk of bankruptcy.
Finally, leasing could improve your bottom line thanks to the generous tax deductions available for the costs incurred. You can deduct your entire lease payment (compared to the interest-only mortgage deduction) as well as property insurance and utilities to see more money back on your tax return. More money in your pocket means more resources to reinvest in the success of the business.
The Benefits of Buying an Office Space
● Long-Term Stability
Although it’s much harder to buy into the real estate market, once you’re in, you’re set. As the saying goes, they’re not making any more land, so the value of your property will almost certainly increase after the initial purchase—especially if it’s located in an up-and-coming market. Rather than paying increasingly steep rental rates, you can benefit from your asset’s capital appreciation over time.
If you have leftover office space, you can rent it out to tenants as a secondary source of income used to cover the mortgage or to supplement the business when times are slow. With every monthly mortgage payment made, you build equity and boost the overall value of your business—unless you pay all-cash and own 100% of the property right away.
Unlike a lease agreement that requires a landlord’s permission to reconfigure the space, owning the property gives you total control over it (with the exception of zoning restrictions). If you want to expand the breakroom, renovate the kitchen, and install a utility sink, the choice is yours and yours alone. Depending on the vision you have for your company, this could prove very beneficial. Plant your roots and brand it however you like—so long as you plan on staying a while.
Owning your office gives you the security of knowing exactly where home base will be for however long you choose. With a fixed insurance rate, you’ll know exactly how much you’ll pay every month and can plan accordingly—and you won’t have to worry about getting hit with a rent spike or being bought out of your lease. If the business fails, you won’t be locked into lease payments and can instead sell the property to recover some costs.
Leasing may be a better choice for younger businesses and should attract those in need of a temporary solution, whereas buying commercial real estate makes sense for mature businesses with plenty of liquid looking to stake a long-term claim in the community. Carefully weigh the pros and cons of both options in order to place your goals within easier each.
Kaelee Nelson received her Master degree with an emphasis in Digital Humanities and pursues her career as a writer in San Diego. She enjoys informing readers about topics spanning industries such as technology, business, finance, culture, wellness, hospitality, and tourism.
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