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Leasing vs. Buying

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Almost every business comes to a point where it is time to decide between continuing to lease office space or to purchase space. While every situation is different, often the same considerations should be evaluated when making this decision. Below are the factors that are somewhat universal, and when coupled with your own specific needs will help you determine what the best option is for your business.

  1. Present and Future Costs – By purchasing office space, you can be assured of a good idea what your costs will be over the long term. With a long-term fixed rate mortgage, you will be able to budget well into the future, providing an added level of stability. If you lease office space, you will be at the mercy of the market.
  2. Management Of Your Space – Even If you choose to purchase office space, it will have to be managed. You can hire out someone to handle it, or you can do it yourself, but this will be time spent not focused on growing your business. If you consider buying more space than you need at the time and leasing it out until you grow into it, property management will become even more of a issue. While a good option for many, all these factors will need to be considered before beginning your search.
  3. Initial Cash Expense - If you are planning to purchase an office, you can expect to make a down payment of between 10% and 25% of the purchase price. This will depend solely on the lender and your credit. Leasing space will not require nearly as much. Depending on your credit, all you will normally be expected to put down is the first and last months rent.
  4. Anticipated Growth – If your company is in it’s early stages, or growing rapidly, choosing to lease would allow you the flexibility to grow and expand. However, if your company has become stable, purchasing can be a great investment as well as a way to stabilize your company for the future.
  5. Opportunity Cost – Purchasing office space will require a large outlay of cash. The opportunity cost of that money needs to be taken into account. You need to consider what return you would expect to receive if you invested the money back into your business or into other investments, as opposed to a down payment.
  6. Appreciation – One of the goals of buying office space is to generate added value through market appreciation. Selecting a property with an eye towards future appreciation, while never guaranteed, is a wise investment strategy.
  7. Tax Factors – Lease payments are usually fully deductible, but many expenses of owning office space must be written off over longer periods of time. If you buy get to take depreciation on the improvement portion of the property and can usually deduct all of your interest payments. When considering the tax factors it is always very important to consult with your attorney and tax professional about the legal and financial considerations to owning office space.
  8. Cash Flow Analysis – In order to really understand the financial aspect of purchasing office space, you need to prepare a detailed cash flow analysis which takes into consideration your predictions on the future including holding period, anticipated appreciation vs. rental increase, interest rates, and cost of expenses increases. It seems like a difficult task, but there some good programs available to help you do this analysis including:  LseMod Buy/Purchase (a sophisticated Lease/Buy Analysis) and REA/L Estate Analysis Software (a program for the financial analysis of real estate).

All of these steps can combine to seem overwhelming, but that’s where licensed commercial real estate brokers come in. Getting guidance from a professional who is involved in the business can significantly improve not only the accuracy of any analysis, but in general simplify the process. Many of the lease vs. buy factors can only be decided by you, but having a helping hand in the areas where office space expertise is important will assure you of making the best possible decision.