All startup and growing businesses often come to a point in time when they have to decide whether to lease or buy some office space for their growing business. Each option has its pros and cons; and considering that as a startup many businesses are often under financial constraints, it is important for business owners to evaluate each option keenly before deciding on which way to go.
Here are some of the key pros and cons of each option. Settle on the smartest bet for both your short-term and long-term business goals by considering these points.
Buying office space for your startup
The main benefit of buying your own facility is that it becomes your own asset; and an asset that ideally increases in value over time. If your startup is doing really well and you have the means to do it, purchasing office space is a great option. It will not only offer your business ample space to grow and expand in the long term, but also act as a guarantee when forming deals with potential suppliers and clients.
When you buy your own office space, you get to lock in your commercial mortgage long term hence giving your business clear and fixed costs. Plus, your mortgage payments go towards building the equity in your property while if you had opted for a lease, the lease and rent payments would have gone towards repaying your landlord’s mortgage.
The associated costs of owning your own office building can guarantee you tax deductions that you would otherwise not get as a renter. For one, you can get to enjoy depreciation deductions yearly. Also if you financed the purchase, you get to enjoy interest-paid deductions. Additionally, depending on several factors such as how long you have been in business, how profitable the business has been, as well as what portion of your rent of purchase price relates to the land; buying land may save your tax bills more compared to a lease.
As a startup, you can take advantage of some of your un-used office space and rent it out to earn an additional income. You also become a landlord and the additional income received from the rented office space can be brought into your business to help fuel its growth.
Total Control Over Your Property
If you intend to have total control over your working space, purchasing your own property is the best way to go. With a lease, you may need a landlord’s permission to make substantial additions or renovations to the property, or even changes to your business operations. If you want to use green design principles in your building, you don’t have to ask anyone to see if undergoing major changes would be okay.
Owning your own working space also allows you the opportunity to sell out and fund your retirement. You can either sell your business and rent out the property, or sell them both together to enjoy their sale benefits in retirement.
Huge upfront costs
Purchasing property initially costs far much more upfront. For most startups, this is why purchasing their own office space is never an option. If you are considering this option, then ensure that you budget for the deposit and appraisal costs together with possible office furnishing expenses depending on your company’s needs. You will also need to ensure that your business is capable of running the necessary repair and maintenance costs associated with owning the office property.
Lack of flexibility
As a startup or growing company, you may experience unexpected growth or needs in the future. Your company may grow massively and prompt you to start looking for space where you can move your business to; forcing you to sell off your current property. If you had leased, however, moving would be easier at each stage of your businesses’ growth.
Adverse Effect on Balance Sheet (if the property is financed)
If the property is financed, it means that your business has taken on some debt which must be disclosed on the company’s balance sheet. This may have an adverse effect on your businesses’ ability to get other types of business financing.
Leasing office space for your startup
Free up your working capital
With leasing, your money is not tied up in real estate and therefore you can invest it in your start-up or growing business to boost its progress. Plus, because leasing does not have an adverse effect on your balance sheet like buying your property with a loan, your ability to borrow funds will not be limited.
Chance to access prime properties
Leasing enables you to rent in areas that are prime locations for your business. For example, restaurants that need access to major streets consider leasing because buying property in such areas is too expensive.
Leasing provides adequate flexibility for start-ups to grow progressively. This means that a start-up may continuously upgrade from one office space to the other as their needs change. They can also utilize shared office spaces to work alongside like-minded companies while saving hugely on costs.
Total focus on growing the business
With leasing, you get the chance to solely focus on your start-up without the worry of repair and maintenance costs associated with owning a building. The landlord takes care of that and you get to concentrate on building your business fully.
Leasing gives you no equity on the property; hence you will be funding someone’s retirement and building their equity with your rent payments instead of building your own asset.
You don’t have fixed costs
A leasing option leaves you exposed to annual rent increases and higher costs by the time your lease expires.
No control over the property
You have no control over the leased property and if the owner decided to sell off the property, they will just refund you some money and force you to move; disrupting your operations and resulting in unneeded expenses.
All in all, the answer on whether you should buy or lease space for your startup is not clear-cut. Your decision will largely depend on your financial status, growth potential, tax, and personal issues. It is recommended that you consult a professional financial planner to give you advice on your situation before deciding to settle on either option.