Small business owners must decide whether to rent or buy property to operate their business. The dilemma often arises once you’ve outgrown home offices or coworking spaces and need stand-alone premises. Both options have advantages and disadvantages depending on your budget, location needs, and growth plans.
Flexibility and commitment
- Renting provides more freedom if you’re uncertain of long-term space needs or location preferences. Shorter-term leases allow pivoting as requirements evolve. However, lengthy leases are required to secure desirable spaces.
- Buying property represents a major multi-year commitment. While offering stability, it limits flexibility to relocate. Selling property also takes significant time and costs when needs change.
Upfront costs
- Renting has lower upfront costs than making a down payment on the purchased property. Even with buildouts and moving expenses factored in, renting requires less cash from day one. It preserves capital for other startup priorities.
- In contrast, buying commands hefty upfront costs between down payments, closing fees, and renovations. Even strong financing options require large outlays early on. This strains cash flow for younger companies.
Ongoing costs
- Renting provides cost predictability if lease rates are fixed over the term. However, landlords hike rents considerably at renewal leading to financial surprises. Buildout investment is also lost if not renewed.
- A purchased property locks in fixed mortgage payments, though annual property taxes and insurance premiums are variable. Maintenance and repair costs for owned buildings also add up over time.
Tax benefits
- Renting offers limited tax advantages beyond claiming a portion of rent proportional to space used for business. Some lease-related costs may be deductible, such as parking fees or utilities.
- Buying has more generous tax perks, including deducting mortgage interest and depreciating the value of real estate assets over time. Improvements and renovations also be deducted annually up to set limits.
Resale value
- Rented spaces are outgrown, incurring costs to relocate and start buildouts again. Renting provides no long-term equity.
- The purchased property accommodates business expansion over time through renovations or additions. Equity also builds through mortgage paydown and appreciation if the location remains desirable.
Customization control
- Landlords control building appearance, renovations, signage, and maintenance with rented spaces. Customization is limited to tenant buildout within the unit.
- Buying allows full customization and renovations to suit unique needs. Branding signage and exterior modifications are flexible within zoning laws. However, owners are responsible for maintenance. Visit the official website to learn more than the basics.
Final Thoughts
- Consider lease purchasing if available – Lease purchasing allows time to test out a space before buying while locking in favorable future purchase terms.
- Involve partners or investors in decisions – Bringing on equity partners to help fund a purchase spreads risk and financial obligations.
- Evaluate contingencies and escape clauses – Well-crafted leases include contingencies for growth, subletting, transfers of ownership, and termination provisions.
- Seek tenant incentives if renting – Negotiate with landlords for rent abatements, buildout allowances, moving stipends, and extended option terms when signing long leases.
For optimal decision-making, involve key stakeholders and run projections on long-term costs. Weigh quantifiable factors like cash outlays against intangible benefits like flexibility and control. Consider both current and future location needs. While major investments, owned spaces become powerful assets over time.
