Office Space: to Buy or to Lease, That is the Question

Sooner or later, every tenant has to decide whether it they better off buying or leasing real estate facilities. Every business is different, however there are some common factors that should be taken into consideration whether to buy or lease an office space.

In general, commercial leasing doesn’t need a large upfront investment. Cash-flow is the main reason. When purchasing an office space, however, much larger down payments are required – typically between 10% and 25% of the purchase price depending on the lender and credit rating, plus closing costs. For established business people who want to be in one location for several years and who have financial resources, buying makes more sense.

Some of the basics of comparing leasing to buying (such as price appreciation, considering cash-flow issues and factoring in the cost of a down payment on something you own versus rental payments that don’t build any equity) are similar to issues involved in deciding whether to rent or buy a house.

What is the opportunity cost for those dollars if used in your business?

Most business owners encounter this decision for the first time; the thought of borrowing money to buy commercial property is as intimidating and overwhelming as it is for a first-time home-buyer.  Ownership can also bring its separate set of headaches – being responsible for maintenance and operations have a great deal of impact.

Advantages and Disadvantages of Buying or Leasing Office Space

Advantages

Disadvantages

Lease

LEASE BENEFITS:

• Credit ratings are not quite as crucial compared to buying.

• Don’t need to worry about selling if moving to a new location

• Your monthly rent is a tax deduction as a business expense.

• You have the freedom to sublet or move if need be at the expiration of the lease.

• No loss due to owning in a bad market.

LEASE DISADVANTAGES:

• Rental rates may have annual escalations based on market conditions.

• Loss of the reversion or the value of the property at lease end.

• No equity buildup.

• Tenant may HAVE to move at the end of the lease.

Buy

BUYING BENEFITS:• Interest on the mortgage loan is tax deductible

• Changes can be made to the building to accommodate your business

• You can take annual depreciation deductions on taxes

• No rent increases

• You can benefit if you sell when the market is good

• If you end up with excess space, you can lease out the extra

• No set hours of business

• You can stay at that location as long as you wish

BUYING DISADVANTAGES:

• Usually requires a lot more initial capital to secure financing

• Property values may decline

• Owning real estate subjects the owner to various legal and regulatory risks not associated with leasing

• Requires owners to invest much time and energy in matters that are not its business, unless property is part of a unit owners association

• Inexperienced owners operate their real estate inefficiently and increase operating costs.

Home Expo Gallery can help you face the difficult decision whether to buy or lease an office space. Many of the buy vs. lease factors can only be decided by you, but having a helping hand with reliable and solid advice based on expertise is important and will assure you of making the best possible decision.

Call us and let us know your situation. We will help and guide you to find your perfect space at the right price, whichever side you are on.

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