Small business owners often must decide whether to lease or buy office space for their small businesses. There are several factors which may impact this decision, including the amount of time the business plans to use the space and the relative cost to buy. You might want to purchase office space if your business plans to remain in one location for more than 10 years. However, it is essential to consider a variety of factors, including the tax implications of leasing vs. buying.
1. Consider the cash outlay required to purchase the type and size of office location the business requires. Expect your lender to require a down payment of 10 percent to 25 percent of the purchase price when buying office space, depending on your credit. When leasing, you can usually expect to pay the first and last month’s rent up front. You must also consider a variety of other costs associated with buying. These can include paying for building appraisals and inspections, loan fees, and a variety of other costs not incurred when leasing.
2. Consider the long-term variable and fixed costs of leasing versus buying. The cost of purchasing office space will likely remain fixed over the term of your loan. For example, if you finance the purchase using a fix-rate mortgage, your monthly payment will remain constant throughout the duration of the loan. However, if you lease office space, your rent can increase with each new lease agreement.
3. Analyze how much and how quickly you expect the business to grow. For a new company, or one that is in a growth phase, leasing may be the best option. This allows the company the flexibility to move to a new location if it outgrows its current office space. You should also consider whether to rent out excess office space if you purchase more than you currently need in the hopes of expanding in the future.
4. Evaluate the market to determine whether and how much the property can appreciate in value while you own it. When real estate markets are down, you can purchase office space below the market price and later sell at a great profit. Conversely, if you wish to move to new office space in the midst of a seller’s market, you can expect the property to appreciate at a much lower rate.
5. Consult with a tax professional to determine the tax implications of leasing versus buying office space. For example, your business might be able to deduct the amount paid in rent if you lease. If you buy, you can deduct depreciation of the property over several years. Consult with a professional to determine which scenario is preferable for your individual situation.
6. Conduct a cash flow analysis to analyze all of the factors from the previous steps. According to the Office Finder website, “you need to prepare a detailed comparative net present value cash flow analysis which takes into consideration your predictions on the future including holding period, anticipated appreciation vs. rental increase, interest rates, and cost of expenses increases.” Any high-quality broker should be able to assist you in preparing a detailed cash flow analysis to help you determine which course of action is best for you.
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