Buying vs. leasing an office space: pros and cons
The decision to buy or lease an office space is one that can ultimately have huge consequences on the future of your business.
If your small business is ready for a workspace, figuring out whether to buy or lease will be an important first step to finding the perfect place. Both options have unique benefits and consequences to consider.
More flexibility, less commitment
Leasing an office space offers business owners a lot more flexibility. You can move out when the lease is up for renewal which may be necessary if your business model changes. Small business owners, particularly entrepreneurs with new startups, can use this flexibility to their advantage because the freedom to move could lead to more innovative ideas.
Also, when you lease an office space the landlord will usually take care of landscaping, building upkeep and cleaning services. If you don’t have the time, budget or manpower to manage a building then leasing is a great option.
The tax benefits of renting an office should also be considered. You can actually deduct the full cost of renting, including lease payments and all other expenses, on your taxes.
Snag a fancier address
If you want to be in a trendy part of town, leasing may be your only realistic option if you don’t have the capital for a down payment. By leasing, you can get a better location at a more realistic monthly price point.
However, the flipside of leasing in a hip part of town is that rent will almost certainly increase every time your lease is up for renewal. Nashville’s hot real estate market might mean large increases for desirable spaces. The average rent per square foot in the Nashville area can be anywhere from $17 in Metrocenter to $35 in the Gulch – make sure your budget can handle rising rents if you want to stick around in a particular area.
Lack of equity
The other issue with leasing rather than buying is not building equity with your monthly payments. This lack of collateral can make it more difficult to get loans for your business later on.
More equity, less uncertainty
One of the main advantages to buying your office space is that the costs will remain steady instead of fluctuating with the rental market. Your mortgage payment will be the same every month and even though you can’t deduct the full cost of your monthly payments, you can deduct interest payments on your taxes. Furthermore, you’ll be building equity which can be used as collateral for business loans or lines of credit and can even fund your retirement.
Increase cash flow
If you own your office space, you can become a landlord yourself and offer any additional space to tenants for more monthly cash flow. If you can make the investment, you can even cover your monthly mortgage payment using rent from your tenants.
Customization of space
Most landlords for commercial spaces will not allow huge changes to the structure of a space. If you own your building, you can make all the changes you want to make the space perfect for your business. This is important for businesses that need specialized equipment or space that may not make sense in a rented office.
By far the biggest downside to buying, and what often keeps businesses from being able to go this route, is the need for a down payment. Commercial real estate is expensive and the price tag for a down payment is often prohibitive for a small business, especially if the business is new. Finding funding to help cover the cost of a down payment is an option – check out some tips for finding funding in Nashville here.
Lack of flexibility
Though owning your building offers more flexibility in customizing your space, it obviously makes moving to a bigger place or different location more difficult. If there is a chance that you might need to move to a different facility in the near future, buying is probably not the best choice.
There is no single right answer for whether you should lease or buy, it all depends on your business’ situation and the availability of properties. To see what’s available, check out our commercial real estate database.