From NFIB - the Vocie of small business
One of the toughest decisions for an independent business is whether to lease or buy office space. "You have to do a thorough financial analysis, taking present values into account and the cost differentials [between leasing and buying]," says Jim Osgood, whose company, OfficeFinder LLC, is a web-based office space referral and information network.
Owners should think about cash flow, future expenses, management costs and more. To help make an educated choice on which path is best, consider these pros and cons of leasing versus buying office space.
- Leasing requires a smaller up-front cash outlay—typically the first and last months' rent—and frees up working capital.
- Renting provides flexibility: If your company is growing, leasing puts fewer constraints on the firm.
- Monthly lease payments are typically fully tax-deductible as a business expense.
- Renting in a high-image area is usually more affordable than buying in a prime location.
- Owners are free to run their businesses rather than manage properties.
- There's a short lead-time to move in.
- Maintenance, repairs and modifications are often negotiable with landlords.
- Costs are variable: The market dictates what you'll pay for rent over time.
- Rental properties do no accrue equity value.
- Landlords may limit expansions and modifications.
- Well-selected properties should appreciate in value over time, allowing owners to sell out and fund their retirements.
- Costs are predictable, particularly with a long-term, fixed-rate mortgage.
- Businesses can take depreciation on the improvement portions of their property.
- Companies can usually deduct interest payments on their tax filings.
- Owners can rent out extra office space as an added source of income.
- Businesses can make changes or additions to the property without obtaining permission, if zoning ordinances permit.
- The outlay of cash is significant, with down payments ranging from 10 to 25% of the total price. Would your return on that money be greater if you invested it back into the business or made other investments?
- There may be a long lead-time to take possession because of real estate closing procedures.
- Managing office space is time-consuming. Owners are responsible for all maintenance and repairs.
- If the property becomes inadequate because of growth or other factors, the company may be forced to sell.
- If cash flow becomes a priority, it may take a while to sell the property.