by Anthony Gilbert
There are few absolutes when it comes to making business decisions because each company has their own energy, mission, and goals that influence every move an owner makes. This can be frustrating for people who could use solid advice at the beginning of their journey, but it's also the concept that separates the successes from the failures. Buying may seem like a smart move when it comes to real estate, but this is not always the case. See how to tease out what's important from each decision and what can be put on hold.
Why Buy an Office Space?
Commercial mortgages mean that an owner will have an easier time planning the budget because their mortgage rates will be predictable, depending on the type of loan obtained. They won't have to worry the market will turn and their landlord will double the price. In addition, owners can use a positive swing in the market for their own gain by renting out additional space in the building to other businesses at the higher rates. Both the direct and indirect expenses (e.g., property taxes, mortgage interest) can be deducted for lower taxes, and owners can also use any appreciation of the property to help fund a lucrative retirement when they eventually sell the property.
Why Lease an Office Space?
Buying is extremely hard on the budget, whereas leasing will be a more reasonable option (at least in the short-term.) Most businesses want to convey a certain message to their clients and their employees, and they may not be able to afford a very desirable property if they choose to buy. In fact, for those who want to work in neighborhoods that attract high-end clients, it's usually the only option owners have if they don't want to sink the company into unsustainable debt. Owners can then use the capital they may have used to buy a property to invest in the longevity of the business.
Disadvantages of Buying Vs. Leasing
Buying is a lot more work then leasing — especially if owners are renting out their property to other tenants. Not only are owners responsible for the costs of upkeep, but they'll also have to settle tenant disputes. These types of time-demands mean less time to focus on the business. It also tends to destroy any kind of financial cushion an owner may need to handle any unexpected expenses that pop up (which are common in a new business.) If an owner chooses to lease on the other hand, they'll have zero equity in the space. They're subject to annual rent increases that they may not be able to pay for.
Tips for Deciding
Owners should have a good idea of what they plan to do with their business before they decide one way or the other. While not all events are foreseeable, owners should have contingency plans on how they'll handle either a dramatic upswing or downturn in their finances. An accountant and a financial planner can help, but only the owner can determine the scope of their business (and thus, the scope of their real estate needs. For example, a small restaurant may have no choice but to lease in a popular area of a town, but a small tech company could potentially build up their business in a fixer-upper office on the outskirts of town that costs pennies to buy.
While buying may seem like the best plan at first glance to some, the fixed-rates the owner guarantees upon move-in may not be as economical as they first appear to be. The real crux of the decision needs to be based on the owner's industry and long-term goals. When a company expands too far too fast, real estate is one of the biggest components as to why a business succeeds or fails. It's why owners need to make plans for unexpected successes or failures before they decide whether to lease or buy.