Written by Brandi McDonald
Small businesses all over the country grapple with the decision on whether to lease their office space or purchase it. This dilemma is far from cut-and-dry. It’s vital to consider the wide range of both internal and external factors that will dictate which of these avenues is the right one for your business.
Below, we will comb through some of these factors and how they should weigh in during the decision-making process.
These are the factors unique to your own business. Deciding whether to buy or lease your office space is really a matter that hinges on the dynamics of your business/industry. The following are some internal factors to consider during the decision-making process.
Size of your company
Purchasing office space comes with less flexibility than leasing. Whether there is the potential for explosive growth in your workforce, or you face the prospect of downsizing, any major shift in the size of your company can render your office space inadequate. If your company is at a plateau, buying office is not much of a gamble.
Another question to ask yourself is, are you willing to take on subtenants in a lease scenario? Do you have the resources to manage a building with other tenants? This can often be an effective way to compensate for downsizing while generating an additional stream of revenue for your business.
Your business has a responsibility to invest its available capital in a way that delivers the strongest return. Investing in real estate (i.e. your office space) might not be the best use of it. It’s important to study the ROIs of investing in your business vs. real estate to determine which is more prudent.
Another question you have to ask yourself is, ‘Do I have the upfront capital needed for a down payment, upfront improvements and ongoing maintenance?’ Purchasing office space requires substantial cash.
Crunch the numbers on your company’s current expenses — lease, utilities, maintenance fees, etc. In many cases, business owners find that they are already paying an amount in rent that is equivalent to what they would be paying for on a mortgage — only, with a mortgage, they’re building equity. If this is the case, purchasing your own office space might be most beneficial.
Location of your space and looking ahead into the future
How does your current location impact your business and employees? Does it have the resources and amenities you need to benefit your business? Also, will the dynamic of the community in which your space is located change over time? How will that affect your business? These are all important questions to ask before buying or leasing.
Forecasting what is ahead is also beneficial. Scrutinizing your plan for the next five to 15 years, including a potential exit strategy, will allow you to make a decision that is best for the long-term. It’s vital to determine whether your office space will be in demand in the future and something that potential buyers will want. You don’t want to be stuck with a bad investment.
The internal factors that guide your decision to buy or lease should be easier to gauge. Internal factors are mostly things that you can predict because you have control over them.
However, many external factors are completely out of your control and must be carefully considered before making such an important business decision.
Will you need flexibility or control?
This, essentially, is what your entire decision hinges on. Owning your office space provides control of your destiny while flexibility is a key selling point for leasing. So, what sorts of external business conditions are you facing? This could be anything from competing businesses to new government policies or potential for natural disasters.
With any of these external events, ask yourself ‘Would flexibility or control benefit me most?
Our country’s tax codes are constantly changing — it’s important to consult with a qualified accountant for complex accounting matters. However, there are many associated costs with owning an office (i.e. property taxes, interest, etc.) that can provide you with tax deductions.
It’s important to note, though, that FASB accounting treatments used to favor leasing. Now, all owned assets and leases hit the balance sheet. A recent Forbes article provided the impact of these new changes from the business owner’s perspective.
On top of tax considerations, owning an office also provides you with fixed costs. You are able to see your long-term costs, whereas, with a lease, your costs are more volatile.
Available inventory in your local real estate market
High-demand areas can come with high prices for both buying and leasing. It’s important to run the numbers and determine how much it will cost to turn an existing building into a suitable space for your business. Compare that with how much it would cost to develop a new building and determine which one makes better financial sense.
Also, consider the real estate climate when drawing up your exit strategy. Have an idea of how long you’ll need to hold on to an asset and whether it will sell easily when it’s time to give it up.
Before you storm out of your lease to buy a building and “control your destiny” think about these important factors. You may not necessarily be throwing money away on your lease – you’re buying valuable flexibility for your company.