Office Space: Should You Buy or Lease?

By Thursday Bram on 21 January 2011 0 comments
Photo: lemonjenny

More often than not, office space isn't the biggest concern for a small business. Retail may be a different matter, but when it comes to an office where you can just get some work done, priorities are a bit different. If you absolutely have to have a place to meet clients, there are conference rooms you can rent out, office spaces rented on a shared basis, and even coworking spaces.

But there will likely come a day when you do need office space of your own. A home office can work for a while, but when you need to bring in an employee, you'll want some office space that you can call your own. From there, you have two options: You can buy, or you can lease.

Understanding the Life Span of Your Business

There's a certain ideal that implies owning your office space makes sense — after all, why pay rent when you can build up an asset for your business with a property? But the key deciding factor should be the life span of your business. If you are certain that not only will your business be around in ten years, but that you'll need to be in the exact same place, buying the office space you need may not be out of the question. But if your business has a less-certain future, tying its health to a mortgage can simply tie up your resources from the start.

For a business that is still evolving, renting offers a certain flexibility, even though you aren't spending your rent money on anything that will turn into an asset for your company. If you need a bigger space, you have the flexibility to move. If you need specialized equipment (and therefore a specialized space), you have the flexibility to move. If you need to add retail space, you have the flexibility to move. But in each of those situations, if you buy office space, you'll either need to sell it or rent it out to be able to move.

Look at Your Cash in Hand

A secondary question comes down to how much cash is sitting in your business's coffers. While getting a mortgage on a house is a fairly simple proposition, it's harder to finance the purchase of office space (especially for a small business with a short credit history). At the bare minimum, you'll need to have a down payment of 30% of the cost of the property, and you can't expect particularly great interest rates on any mortgage you take out. Furthermore, you'll be facing the costs for an appraisal, a building inspection and other odds and ends before you get to the closing.

In contrast, renting a space will cost you the first month's rent and a deposit (probably around the cost of a month's rent). That's a fraction of what you'll need to have up front to buy space.

The tax factor can also tip the scales: While your business can deduct the full amount paid for rent in a given year, the cost of buying commercial real estate (as well as improving it) is depreciated over 39 years. That means that your tax situation will likely be better renting office space, although it's important to check with a tax professional to be sure of your own situation.

Ready for a Secondary Business?

By choosing to buy office space rather than rent it, you're putting yourself into a second business — real estate investing. If you buy a property with more space than your business currently needs (generally a good plan if you expect your business to grow at all), you'll put yourself in the position of needing to rent the rest of that space to others until you're ready to use it. While that can be a good thing (at the very least, renting out space makes it easier to be sure you can pay the mortgage every month, no matter how your business is doing), that does mean that you have to pick up the nuts and bolts of being a landlord while still focusing on growing your business. The financial situation may work out, but it's worth looking into what it takes to be a landlord before making a decision.

Buying a property may also put you in the position of selling it for a profit down the road, at least if you were able to select a piece in an area where land values are appreciating. That sort of financial boost can be pleasant, especially for a small business owner who may be looking for capital to invest back into the company.

Making the Final Decision

For most small businesses, renting office space is by far the easiest option. You don't need to come up with much cash up front, you aren't tied to a property, and you don't have to figure out how to run two businesses at once.

Of course, those obstacles aren't insurmountable, and there are some points when buying office space makes sense. If, for instance, you do have the capital available and you can cut what you're paying in rent as well as pick up an investment, buying makes a lot more sense. Similarly, if you're in a market where renting is more of a gamble — an area where rental prices fluctuate dramatically — buying can be a way to keep control of your costs.

At the end of the day, it's important to look at what your business needs. See what's happening in terms of commercial real estate in your area and how that impacts you, too. You should consult with a financial advisor, as well as a tax professional, to see what will be the best fit for you. All these factors must contribute to the right decision for your business. Only then will you know if renting or buying is the best choice.

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