Deciding Whether to Lease or Buy Space for Your Business
When you venture into the world of business ownership there are a number of decisions to make. One of them being where you will operate from. While some businesses can easily be run from a home office others may need a little more space. Or maybe you have been doing very well and need to move to a larger space outside of the home. Whatever the reasons for finding the best space to operate your business from you will want to decide whether to lease or purchase the office space you need.
Whether you decide to lease or rent an office space, it is a big financial investment. There are pros and cons to each option. Here are some things to consider about both leasing and purchasing a facility to run your business out of.
Benefits of Leasing
If you have not found the space that is just right for your business or are not quite ready to make the commitment of buying a property, leasing has a number of benefits.
No down payment. When you purchase a commercial property or any property for that matter it is best to make a down payment. Most down payments can be anywhere from 10 to 30 percent. When you lease you will only need to pay a deposit usually in the same amount as the first month’s rent. If you use a broker you will also need to pay the broker fee. If you hire an attorney to go over the lease agreement and do any negotiations you will probably end up paying 2-4 billable hours.
You can deduct lease payments. When leasing a commercial property a business owner can deduct lease payments and other rental expenses on taxes.
The landlord is responsible for most of the repairs and maintenance. Depending upon the terms in the lease agreement, you will only be responsible for basic upkeep and care of the items in the office. It is good to know which party is responsible for what.
You can probably afford a higher end property in a more expensive area. It can be out of reach to purchase a building in a lofty area of town, but leasing may make it affordable to conduct business in a highly desirable location.
Benefits of Purchasing
You build equity. This is the biggest advantage to purchasing an office space. You can use the equity later as collateral when the business expands and can use it to fund your retirement.
Costs remain steady. If you take out a fixed loan on the property your monthly payment will always be the same and you will not have to worry about rent being raised.
You can depreciate the building. You will not be able to write the entire cost of the purchase at once, the IRS allows you to depreciate it , usually over the course of 39 years. Refer to IRS publication 946.
Interest payments are tax deductible. Mortgage interest payments are deductible unlike with lease payments.
You can rent out space you don't need. If you purchase a larger property, you can use the extra space as a source of extra income.
The decision to lease or buy is very much dependent upon your current financial situation, the health of your business and projection, and many other factors. There is no single universal answer as to whether it is better to lease or purchase an office space.