You've found the perfect commercial property for your business. But do you buy it or lease it?
Examine the pros and cons of both methods so you can decide whether to buy or lease your office space.
What's the difference between buying and leasing commercial property?
You should understand what it means to buy or lease your office space before going down either path. When you buy commercial property, you are purchasing it from a seller with cash or loan proceeds. When you have paid off the loan, you own it outright.
Leasing commercial property means renting it from its owner. You can rent on either a short- or long-term basis. You will be a tenant rather than a property owner. But a lease-to-own plan can put you on a path to ownership.
The pros and cons of buying office space
The benefits of buying your own office include:
- Equity. Your ownership stake in the property would grow as you pay down the loan principal and interest. You can use this equity as collateral for future financing needs.
- Appreciation. Commercial property in many markets tends to appreciate or grow in value with time. You can later sell the property and use the sizable profit to fund other work or personal goals.
- Tax breaks. Your depreciation are both considered tax-deductible. These savings can help offset the costs of property ownership. You cannot deduct the monthly mortgage payment itself.
- Rental potential. As the owner of a property, you can rent it out to other tenants. The rental income can serve as a handsome passive income stream.
The drawbacks of buying your own office include:
- Higher upfront investment. You will have to make a sizable down-payment that can tie up a large chunk of cash.
- Upkeep costs. You won't escape property costs even if you pay for your property outright. You will be responsible for property taxes, insurance, repairs and maintenance. These costs would eat into the profit you pocket when you sell the property.
- Lack of affordability in competitive real estate markets. Depending on where you live, you might not be able to afford a property in the location you wanted.
- Lack of flexibility: Having a mortgage can tie you down to one place.
The pros and cons of leasing office space
The benefits of leasing your own office include:
- No down-payment and lower upkeep costs. The lack of this large upfront investment keeps your funds more liquid for use in other areas. Your landlord would take care of all or most repairs and maintenance on a gross or modified gross lease.
- Affordability in competitive real estate markets. Rental payments make it easier to get your foot in the door of a hot real estate market.
- Flexibility. You can choose to stay or move after your lease is up. You're not locked into a mortgage.
- Tax breaks. You can deduct the entire monthly lease payment as well as ongoing costs such as utilities.
The drawbacks of leasing your own office include:
- Lack of equity opportunity. Your monthly rental payments in most cases won't get you an ownership stake in the property.
- Exorbitant rent. Your monthly rent might be more than the average monthly mortgage payment in some areas.
- Higher upkeep costs on some leases. Net leases shift more of the cost burden of repairs and maintenance from the landlord to the tenant.
- Rent hikes. Your rent now may not be your rent next year or the year after. This can make it difficult to do long-term budgeting.
Should I buy or lease my office space?
The decision of whether to buy or lease your office space comes down to your preferences. Buying is a sound option if equity building and resale are important. But you should be able to afford the down payment, mortgage payments and upkeep.
Leasing is a good option if you don't want to commit to one location or property. Or, you might want to cut down on ongoing property maintenance. But prepare yourself for some upkeep costs and rent hikes.