Lease or Buy: Pros & Cons
Once you decide to move your home office to an external location, you must decide whether to lease or buy. Generally speaking, the biggest consideration between the two is the cash flow situation. Normally, leasing requires less money upfront. (a fact that tends to appeal to folks just starting out, with perhaps less capital on hand than more established businesspeople). Other factors in the decision-making process include:
- Permanence. For more established businesspersons, buying becomes a viable option if the plan is to stay in one location for at least several years, particularly if the neighborhood is one well-suited to the business (e.g. fine jewelry in an upper middle class area.)
- Affordability. Business owners looking to buy typically are willing and able to make a substantial real estate investment. By the same token, buying property usually assures a fairly predictable annual costs. (an attractive benefit even for someone just starting out.)
- Fixed costs. Besides locking in a long-term commercial mortgage, you won't be dealing with rent increase.
- Tax deductions. Owners can usually deduct the full amount of mortgage payments, with repairs written off immediately. However, improvements to commercial properties have to be deducted over 39 years. Depreciation on commercial buildings likewise is taken over a 39-year period.
- Extra income. You may be able to lease out a portion of the building if you determine that you have excess space.
- Control. If you need to make substantial changes to the building to accommodate your business, you own those changes, not your landlord. Business hours are up to you, and you can remain in your location indefinitely.
- Future Sale. You'll benefit financially if you sell in a good real estate market.
- Up front costs. Buying commercial space will initially cost far more up front. Property, appraisal and maintenance costs, along with a large down payment and potential property improvement costs, also are concerns.
- Lack of flexibility. You may outgrow your space and be forced to sell.
- Prime Property. A leasing office space option provides a business with the chance to rent in an area with a good location and high image. If your small business is dependent on location and image, such as retail or restaurants, the leasing option is much more affordable.
- Free-up Working Capital. With your money not tied up in real estate your business can respond to opportunities in the market. In addition, your ability to borrow funds will not be as limited as with buying office space.
- Easier to qualify. A strong credit rating will not be quite as critical for leasing as it would be for buying. This may be a big concern for start-ups and small businesses.
- Tax deductions. Your monthly lease payment is tax deductible because it's a business expense.
- Freedom. You'll be able to sublet and move to another location if you need or want to, with no hassle of selling before you can move and no loss from owning a building in a bad real estate market.
- More time and money. You'll be free from the headaches and cost of maintaining your own building, with more time to focus on running your business.
- Variable costs. You may be subject to annual rent increases and higher costs at the time when your lease expires.
- Non-renewal. When leasing property, one can fall prey to a variable market when the contract expires.
- Broken lease. It's usually possible to break a lease if the landlord and tenant both agree in writing. Still, a standard agreement means either party can terminate lease by giving notice within a set period of time. As a tenant breaking an agreement, you can be made liable for rental costs for a prescribed time period (e.g. six months, a year). In addition, the landlord may hold you responsible for any advertising fees incurred in the search for new tenants.
- Lack of Equity. You will be funding someone else's retirement with your lease payments.
- Lack of Control. You may not be able to make space modifications you would like and may have the headache of dealing with a troublesome landlord.