So the question of whether to buy or rent office space eventually comes up in evaluating your options. Since most businesses start off renting, the question is usually whether or not to stop renting office space and purchase either their existing office or moving to a new facility.
There are many factors that go into the decision of whether to buy or rent office space. Here are a few of the most important factors a company should factor into their decision.
- Cash Outlay – A mortgage will require a down payment of at least 10%, on an SBA loan, but more often will cost up to 25% of the purchase price. The cost outlay of renting is usually just the first and last month’s rent.
- Opportunity Cost – Since a down payment is a considerable amount of cash, a company will have to consider the cost of missing out on the resources being allocated elsewhere. What sort of return could you expect on the money invested in real estate vs. your potential return from the real estate investment?
- Fixed vs. Variable Cost – When a company purchases a building, the costs are pretty much fixed, especially if that company has a fixed-rate mortgage. This is not the same if you lease, since prices depend on the market.
- Growth Considerations – Are you an established company or are you in a growth phase? Are you looking to add more equipment, staff, etc.? Renting office space would offer more flexibility for the future. If you are more established, then this need is obviously less important.
- Property Management – Managing a property (i.e. repairs, lawn care, etc.) costs money. If you don’t do it yourself, you will have to contract it out to someone else, which will be added to operating costs. Many companies curtail this cost by buying more space than needed and then renting it out to other businesses.
- Appreciation – One of the main advantages of owning office space is that the building’s value will appreciate over time. On the flip side, renting is essentially an expense with no return from an investment standpoint.
- Tax Factors – Lease payments are fully deductible, while expense on an office needs be written off over many years. However, if you own an office then you can deduct all interest payments and take depreciation on capital improvements.
The Next Step
Most of the rent or buy office space factors can be calculated by the business owner, but it is a good idea to consult a commercial real estate professional to get a better idea of your options. Still, the final decision rests with the business owner, so it is important to run a cost-benefit analysis.
If you are looking to buy or rent office space, contact us on our website to see how we can help you meet your needs.