When you start your own business, you’re faced with hundreds of decisions and considerations every single day. Sometimes it’s overwhelming and people get discouraged by how much work actually goes into being a small business owner. Having a great idea for a product or service isn’t always enough to build a successful business. You’re going to need office space and equipment to get started, but most start-ups don’t have a lot of capital in the beginning, so every dollar counts. One of the most important decisions you’ll make when first starting out or expanding your business is whether to lease or buy office space. There are advantages and disadvantages to both options, depending on your business needs and financial situation. Here are some key factors to consider when making your decision: If you’re planning on working from a particular spot for an extended period of time (i.e. more than 5 years), you should consider buying rather than leasing. Look at the lease terms versus the purchase price and work out how much you’d be spending with each option. Make sure you look into taking advantage of tax deductions, grants, fixed mortgage rates, and the potential money earned from future sale of the space. Purchasing does require you to pay upfront, so if you know you don’t have the resources to do so, leasing might be a better option.
Right now, you’re small. Few employees, not a lot of equipment or supplies, so you’re looking for office space that matches your current size. But there’s always the potential for growth in the future. In three years, your workforce could double in size, and that little office that was perfect in the beginning might be too small. If you were just leasing that space, it would be easy to relocate to another location, or even lease additional space in the same building with little or no hassle or financial strain on you.
If you bought the space, it can be a little more complicated. Selling it might be difficult, or you might not have enough money to afford a new space right away. See if you can buy or lease more space in your building or lease out your current space at a profit to help you pay off your new space. If you can foresee a big amount of growth in the near future, leasing might be a better option. There are numerous tax issues to consider when deciding to lease or buy. Commercial property owners often have the option of deducting building improvements, interest on purchase loan, property taxes, repairs, and other applicable expenses. If you lease, you can typically deduct the amount you pay in rent. Tax codes differ greatly from state to state, so make sure you consult a lawyer and do research so you’re familiar with what would apply to your situation. Buying a space is attractive because it allows you to lock in your mortgage payments long term so you know what fixed costs you’ll be paying. You also have the potential of making income in the future by leasing out your space to others, or by selling the appreciated space for more than you bought it. There are also tax deductions available to building owners that can help with the cost of running a commercial space. You are also building up equity when you own your own space. However, owning commercial real estate requires a lot of capital up front, and can reduce your flexibility as your needs change in the future. It’s also a much bigger time commitment since you have to manage your property in addition to your business. Leasing can often allow you to get prime real estate at a price that’s cheaper than buying a space in the same area, as you don’t need to have all of the capital upfront. When you don’t have your money tied up in real estate, you free up working capital to be able to respond to opportunities in the market. It also gives you time to focus solely on your business, as it requires a lot less of your time and energy. You also have the freedom to move spaces as your business grows and your needs change. However, rent costs can fluctuate annually, meaning your costs could increase year over year, or you can be subject to non-renewal, which means you’d have to relocate, which can be a hindrance. You’re also not building any equity and you’re limited in the changes you can make to the space. Planning Tools & Resources There is no clear cut answer to whether you should lease or buy a space, since each business situation is unique. Take the time to define your needs and do plenty of research before you make a decision There are many tools out there to help make that decision easier, such as lease vs buy calculators and small business advice blogs. If you love this post, kindly share with your friends on Facebook, twitter, Google, Stumbleupon, Pinterest, Linkedin, by hitting the various buttons at the bottom of the post. Remember also to
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Sydney Gallimore is content manager for Tryon Plaza, Charlotte’s premier office space for entrepreneurs since 1927.