Renting vs. Buying Office Space: Which is better?

“Should I rent or buy office space?”. You will find yourself asking this question at some point regardless of the type, size and structure of your business.

The answer mainly depends on the choice of property. If you can’t find what you are looking for rent, you may have to settle with purchasing the place, or vice versa.

As a business owner you have to carefully weigh out the pros and cons of each choice before finalizing your decision.

To help you make the best decision, I have put together a list of pros and cons for renting vs. buying an office space. Check them out below.

Pros of renting office space

• Low financial commitment

There is no down payment when leasing office space. You just need to pay a refundable deposit that typically equals to one month’s rent. Some landlords may request a six-month rent as deposit but nevertheless it’s still cheaper than buying an office space.

In addition, you may be required to pay a one-time broker fee if you found out about the place through a real estate broker. And since negotiations and contract signing must be done in the presence of an attorney, you will have to bear the cost of hiring one as well. The more hours of the attorney’s time you take, the more expensive the fees.

The leasing option allows you to use the extra money to respond to opportunities in the market such as event hosting for brand awareness and etc. It’s always good to have more working capital, especially for startups and small businesses.

• Access to prime property

It’s impossible for small business owners to muster the kind of money you would need to buy a commercial property in a high-end area.

If a prestigious address and image is necessary for the type of business you run, renting would be a better and cheaper option.

Renting lets you access high-end properties in popular areas that would have otherwise been impossible to buy with the capital you have.

Even if you had the money, it would still be difficult to find one since most commercial properties in well-known locations have already been purchased by real estate agencies with the hope of leasing them for a high price in the future.

• Limited responsibilities

This brings us to an important yet often overlooked point. Do not sign a rent contract if it doesn’t specify who is responsible for what. The landlord should be responsible for repairs and maintenance, not you.

The whole point of not buying your own place is to avoid the responsibilities that come with it. Yes, even as a tenant you are responsible for keeping the place clean and unharmed but the landlord should agree to pay for repair and maintenance expenses as well as for any improvements (within a budget).

For example, if the heaters stop working, it doesn’t make sense for you to pay for the repairs since you don’t own them. Discuss such matters with the landlord before signing the contract to avoid any issues in the future.

• Tax deductions

When you rent commercial property, the monthly rent payments are tax-deductible as a business expense.

• Shared payments

Some landlords may agree to pay for a certain utility such as waste management but regardless, the utilities are your responsibility so you can’t blame them if they don’t. Some may even agree to pay for security within the premises.

• Easy to move out

All businesses grow as they receive more and more clients and employees. At one point, you would feel the need to look for a bigger office space. When such a time comes you would have only a few worries in your mind since the place is rented.

Cons of renting office space

• Broker fees

If you found out about the place through a broker, you will be required to pay either a one-time fee or an annual fee for the duration of the lease.

The fee is usually a small percentage of the annual rent amount and should be negotiated before signing the contract.

• No equity build-up

You won’t have equity in your premises and you would just be funding someone else’s retirement with your monthly rent payments.

• Rent increments

Landlords usually make annual rent increments when renewing the lease contract.

• Being at the mercy of someone else

Most commercial property landlords are wealthy individuals. They may not have the time to visit and examine the issues you are facing immediately. You would have to wait until they find the time to do so but, then again, the quality of the repairs is entirely in their hands.

• Rules

Landlords may impose some rules regarding the use of outside areas of the premises that may affect the ability to store company vehicles and materials. Be sure to discuss these things beforehand.

Pros of buying office space

• Equity build-up

Commercial property, or any property for that matter, appreciates over time. This means the property’s value increases over time.

You could use the commercial space you own as collateral when applying for loans. You could even sell it and use the money to fund your retirement.

• Building depreciation

Depreciation is an annual income tax deduction, which allows you to recover the cost you incurred purchasing the property, over time. Of course, you can’t expect to recover the entire amount in a short period of time. That’s why IRS allows you claim depreciation for up to 39 years. For more information, refer to IRS Publication 946.

• Tax deductions

You can deduct the monthly mortgage interest from taxes as an expense. Although you can’t deduct the entire payment like you do with the rent, you can at least deduct the interest within the payment.

• Limited rules

You are the landlord of your own property. So why “limited rules”? Shouldn’t it be “no rules”? Well, let me explain.

Cities have certain rules regarding the placement of signage and the changes you can make to the exterior of your premises or building.

For example, you may need to obtain a “building permit” from the Planning & Building Services Department if you want to use bright colors in the building’s exterior.

If you don’t want your business to be legally vulnerable, you need to be aware of other licenses and permits as well.

• Additional source of income

You could rent out extra space for a decent amount. It would increase the cash flow and diversify the sources of your income.

Cons of buying office space

• Huge financial commitment

You would need to pay a substantial down payment, whereas renting allows you to invest that money in the growth of your business. Since you own the place, you would have to pay for renovations as well.

• Lack of flexibility

Small office spaces carry the risk of being inadequate when your business starts to grow. Then you would have to sell the property, which by itself is a time-consuming and cost-oriented task.

You would have to pay real estate agencies to get them to put your property in their listings and publish online advertisements. You would also have to deal with quite a lot of paperwork.

• Maintenance and insurance

You will be responsible for all maintenance costs and you will have to purchase property insurance as well.

Conclusion

There! I covered the pros and cons of renting vs. buying office space. What you choose will depend entirely on the type, size, capital and goals of your business.

Renting is the best option if you don’t want the headache of owning a property and prefer to have more cash flow than equity.

If you care about equity more and prefer to have more control over the place, you would be better off buying an office space.

To make sure that you are not taking the wrong decision, discuss with an accountant and financial planner first.

If you are renting a place, make sure the contract specifies everything clearly, especially the rules. If you are buying, make sure the place has enough room for future business growth.

Also, don’t choose a location just because you like it. That’s not good enough a reason. There are so many things you need to consider when choosing a good business location. So do your research before proceeding.

Personally, would you prefer renting or buying office space? And why? Let me know in the comments section below.