Running a business is part of the quintessential “American Dream” for lots of people. And owning the property which houses that business is a major part of that vision for many aspiring entrepreneurs. However, there are some downsides to buying office space outright — and some disadvantages to leasing, too.
Let’s take a look at both of these options in turn and explore some of the reasons why choosing one road over the other might make more sense for you and your dreams of small-business-owner independence.
Why Buy Office Space?
One of the primary advantages of buying office space budgeting. When you buy, it can be easier to factor in fixed mortgage payments over a longer term, versus renewing a lease on a regular basis and hoping your landlord doesn’t raise the price of your rent.
For enterprising business owners, having a space to call your own also means you have an additional potential revenue stream, should you need it. Businesses with extra space under their roof can choose to subdivide the space and find tenants to share it, thereby securing additional income to supplement your earnings.
Buying office space of your own can be a wise investment. You can reasonably expect that your commercial office space will appreciate in value during the time you own it. This gives you an attractive option down the road for divesting yourself of the property at a profit. And depending on which stage of life you find yourself, that could mean a nice beginning to your retirement or, potentially, a kick-start to a fresh business venture.
Why Wouldn’t You Want to Buy Office Space?
The higher upfront costs are probably the most obvious, but certainly not the only, disadvantage for business owners considering buying a property. When you find a location that suits you, there’s the down payment to consider, the property appraisal, closing costs, outstanding maintenance to tackle and, of course, the need to improve or upfit the space to suit your needs.
And that question of maintenance expenses is definitely one to consider. As a lessee, you’re not responsible for footing the bill when it comes to seasonal maintenance and addressing broken appliances or structures. But if you own your property, you’re on the hook for these items when it comes to the expense and the time required — although you can retain a property management company to share the burden.
Another downside to buying office space involves flexibility — or, rather, a lack of it. It’s possible your company has reached a certain level of maturity and you don’t expect substantial growth. But it’s also possible other factors will conspire to alter your real estate needs in the future.
One never hopes for this, but consider the impact a downturn in your industry or local economy could have on your space and workforce needs. The future is a difficult thing to predict with any clarity, but owning your own office space may reduce your ability to react to certain kinds of changes.
Why Lease Office Space?
The biggest appeal of renting office space is the ability to secure a prime location with good visibility and, in many cases, appealing walkability for your customers and your employees.
Maybe this isn’t as relevant for some businesses compared to others, but “location, location, location” definitely matters for lots of companies concerned that want to project a premium image or be seen as an integral part of the community. Leasing may open doors for you — literally — that would be beyond your reach if you were committed to buying a property outright.
Consider the three major classes of rental buildings — A, B and C — which offer different value for lessees and variable “fit and finish,” ranging from top-quality buildings with the latest amenities to more seasoned properties which offer better value but potentially lower curb appeal.
Leasing office space usually results in the ability to keep your financial footing a little more nimble over time compared with buying. Although owning property can be an attractive investment vehicle in a lot of cases, it requires that you keep more of your working capital tied up in your office space.
For growing businesses that require those funds to invest elsewhere — in personnel, equipment, marketing and more — having that much capital “locked away” can be a deal-breaker, no matter how badly you’d like to achieve real estate independence without landlords to answer to.
There’s also the matter of time management.
We probably don’t need to tell you that owning a business is, itself, a colossal undertaking that can vacuum up lots of your time and mental bandwidth. If you’re like a lot of entrepreneurs, you relish the idea of keeping your hands on the tiller and navigating your business to success.
Making a purchase as significant as office space means you’ll have to sacrifice some of that time and attention to your building itself — whether it’s dealing with the financial side of things, making sure any maintenance concerns are tackled in a timely fashion, or even navigating insurance claims if something should go wrong.
In short, if you already find yourself stretched thin or feel slightly overwhelmed by the pressures and responsibilities of owning a business, leasing may be the more prudent choice.
Why Wouldn’t You Want to Lease Office Space?
If one of the chief advantages of buying office space is predictable budgeting and a fixed pricing structure, leasing offers the inverse — the potential for annual increases in your rent and higher overhead over time.
The question of equity is also an important consideration. Renting office space makes your business more flexible and better able to withstand uncertainties in the market, but it also leaves you without a way to build equity. In fact, as a lessee, you help somebody else build their equity and nest egg. As a tenant, you have no real financial stake in your location.
It’s worth noting that leasing office space means you’ll potentially have fewer options when it comes to how you use the building and which changes you’re permitted to make. If your company has specific structural and space requirements, you may find the flexibility and freedom afforded by property ownership to be a major deciding factor.
The Bottom Line
Your business isn’t like any other business on earth — it’s as unique as you are. And that means weighing the variables, not the least of which is the future financial stability of your company.
Buying office space makes good sense for businesses which stand on confident footing, have capital ready to go on day one to deal with the initial costs, and the resources to ensure the space is kept functional and attractive for customers and employees.
It may make you feel a little less independent, but leasing is a perfectly acceptable route to take for many, many businesses that need office space but are growing rapidly, that may need to downsize, that are exploring alternative business models or that anticipate other kinds of uncertainty down the road.