If you’ve noticed that your office is getting a bit crowded, then it is probably the right time to look for a new space. There are many things you should consider when selecting a new facility, such as how much room you will need, what amenities are necessities―we’re looking at you, parking―and how to accommodate any hybrid workers. One of the most important concerns, and the very first thing to consider, is whether you should lease or buy your new space.
Since growing companies often have robust revenue or at least a significant amount of capital in the bank, buying office space can be a viable option for your business. But even if the expense is affordable, is it the best use for your money? It’s important to weigh the benefits and drawbacks of buying an office compared to leasing before you make such a big step. Here are some pros and cons to get the conversation started.
Financial studies have shown that, for a short term, leasing is more cost-effective than buying. However, if you are considering a property where you can make your headquarters for a decade or more, then buying becomes more financially attractive. One analysis indicated that seven years seems to be the tipping point, but each case differs. See our section below on financial considerations to review before leasing or buying.
If your business is booming and you anticipate rapid growth in the next few years, then leasing gives you greater flexibility to move if you outgrow the new facilities. If you purchase, you may outgrow the building or purchase more building than you need, with the associated expenses. This also applies if you think your business may downsize in the next few years.
Once upon a time, real estate was a sure investment but now it’s more volatile. If your local area has been in a slump but is coming out of it, then this could be a good time to invest. However, if property values are declining or are overinflated, leasing might afford you a better location and protect you from losing the money it could cost you if you had bought and needed to sell.
As you read the pros and cons in the next sections, evaluate how important each is to you and weigh them accordingly.
The main advantages of leasing include low initial commitment, flexibility and ease of maintenance. However, you sacrifice equity and control over your facility.
When leasing a space, updates may end up increasing your rent when your lease comes up for renewal.
Buying provides equity, and you have complete control over what you do with the property, but you commit a lot of capital from the onset and are responsible for all maintenance.
Commercial buildings are Class A, B or C. Usually, Class A is new construction with modern features built in. Class B is somewhat older and may need a few updates while Class C is usually over 20 years old and more likely to need extensive updates.
As noted above, the longer your commitment to a location, the more cost-effective it is to purchase rather than lease your office space. However, before you commit, run some numbers or have your accountant do an analysis of costs over time. These are some of the things to consider:
There’s no blanket answer for whether to purchase or lease your next property. It depends on how your business is faring, whether cash flow is more important than equity, if you prefer to control your property or have the ease of someone else caring for it and myriad other factors. Take time to make an informed choice.
Jennifer Dublino contributed to this article.