Whether you’re a small business just starting out or a major corporation that is expanding to a new area, you might be wondering whether you’re better off leasing your office space or purchasing a property. In truth, there are pros and cons to each proposition, and the best option for your company will depend on several factors, including the size of your business, plans for growth, and the amount of cash you have in your coffers. And there are other issues to take into account, as well, that have more to do with the type of business you run. So here are a few general considerations to mull over before you decide which option is best for you.
Let’s start with the financial benefits and drawbacks associated with buying and leasing commercial real estate. To begin with, leasing is a lot less expensive, at least initially. No matter what size of space you need, a down payment and other costs related to purchasing property (inspection, closing costs, insurance, etc.) are going to set you back significantly. For most small businesses this simply isn’t an option, although established companies may be better equipped to handle up-front expenses of this nature. Leases, on the other hand, are a set monthly fee that you begin paying once you’ve signed the paperwork. So whereas you might have to pony up $100K (plus fees) to buy a property, you could be looking at monthly payments of, say, $3,000 for the lease.
On the downside, of course, is the fact that you’ll have to continue paying a lease indefinitely and the price can change when your contract expires (generally within 3-5 years). So if the value of the property increases for some reason, your rent could go up significantly, forcing you to relocate if you can’t pony up the dough. Of course, the business is generally liable for repairs, but that’s a knife that cuts both ways since damage caused during your tenure could come out of your security deposit. But there are tax issues to consider, as well, namely in the form of deductions. When your business rents, you should be able to write off the full amount. When you buy, however, you’ll only be allowed to write off certain expenses, such as interest payments, property tax, and so on. While you can write off repairs and improvements, they latter may have to be deducted over the course of several years.
But aside from monetary concerns, there are a few other things to think about. When you own a property you can do whatever you want with it, whereas leasing often comes with a laundry list of restrictions associated with how the property may be used, modified, and even advertised. You should also know that lease agreements vary from one property to another, so you’ll need to read the fine print on every contract (or better yet, have an attorney look them over) in order to ensure that you fully understand the terms of the agreement. In short, you really need to consider the needs of your business operation before you start searching sites like Zillow, Trulia, etc; for properties for sale or lease. When you know what you want and what you can afford it should help you to decide which type of business location is right for you.