To Lease or to Buy Your Small Business’s Office Space?

Anybody who starts a small business is immediately faced with a seemingly never-ending series of decisions. Some are small, and some are large, but they all have the potential to impact your bottom line. One of the most important decisions a business owner will face early on has to do with office space. Is it better to lease or to buy your small business’s office space?

Here are some things to keep in mind while you make this decision.

Upfront costs: When you buy commercial real estate, you may typically have to invest up to six times in upfront costs compared with leasing commercial real estate according to an article on FitsSmallBusiness.com. Most purchasers of commercial real estate finance the purchase with a loan that may require up to 20 percent as a down payment. Add in due diligence fees and closing costs, and this becomes the largest drawback to purchasing commercial real estate, FitsSmallBusiness says.

Length of commitment: Financial studies have shown that leasing is more cost-effective than buying in the short term, according to an article on Business.com. In other words, if you’re not planning on being there long, a lease may be a more attractive option. However, if you want to make a property your HQ for 10 years or longer, you may be better off buying, say experts.

Flexibility: Especially in the first years, businesses may experience unforeseen circumstances that change their office space needs. For example, growing more rapidly than you initially predicted may be a nice problem to have—but if you’re growing out of a space you’ve already purchased, you’ll need to consider selling it.

Taxes: The associated costs of owning and running a commercial space can provide tax deductions—e.g., mortgage interest and property taxes—according to an article on The Balance. However, lease payments may also be tax-deductible.

Maintenance: If you lease, the landlord may be responsible for the upkeep, repairs, and maintenance of the property, depending on the type of lease that is negotiated. If you buy, that burden is solely on you. Every business owner needs to decide for himself whether maintenance of a property is a task he has the bandwidth to take on. “Any type of ownership comes with headaches,” notes The Balance. “A leasing option affords the time to focus solely on running your business.”

Location: In many cases, a business can afford to lease in a higher-end area than it can buy in. “It can be cost prohibitive to purchase commercial property in an expensive area,” says an article published by Intuit, “but leasing will give you access to higher-end properties for less money than if you bought there.” This is a particularly important consideration for businesses that rely more on location and image, such as restaurants or retail, The Balance points out.

Equity: When you buy a property, you begin to build equity with your monthly loan payments. “A portion of those monthly payments goes towards paying down your principal loan amount,” explains FitsSmallBusiness.com. “When you eventually sell or refinance your property, you can extract the difference between the remaining loan amount and the current fair market value as equity for your business.” If you’re leasing, on the other hand, you are “funding someone else’s retirement with your lease payments,” warns The Balance.

The decision between leasing or owning has many variables, experts all agree, and each business owner’s situation is different. The advice of a qualified Maryland business law attorney may be invaluable as your small business starts to grow. Contact Lusk Law, LLC, to set up a consultation to help you consider all the angles that can lead to your entrepreneurial success.

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