Whether you lease or purchase your office space, it represents a major financial investment, and there are pros and cons to each. If you haven’t yet decided which move is right for you, here are some issues to consider.
The Benefits of Leasing
If you haven’t yet found the perfect property to purchase, or aren’t ready to make a purchasing commitment, leasing offers a number of benefits. Here are four to consider.
- There’s no down payment. When you purchase property you will need to put down a large payment, anywhere from 10 to 30 percent. But when you lease, you will only have to pay a deposit that typically equals one month’s rent, and, if you use one, a one-time broker fee. If you hire an attorney for negotiations, you should expect to pay for two to four hours of the attorney’s time. Leasing allows you to use your remaining available cash for working capital or expansion.
- You can deduct your lease payments. When you lease commercial property, you will be able to deduct your lease payments, as well as other rental expenses, on your taxes.
- The landlord should be responsible for repairs and maintenance. Depending on how you negotiate your lease, the landlord may agree to pay for maintenance expenses, repairs, and improvements. You will likely be responsible for keeping the carpets and interior space clean, but the landlord will be responsible for keeping the building in good repair. Be sure your lease specifies who is responsible for what.
- You can lease in a higher-end area. It can be cost prohibitive to purchase commercial property in a expensive area, but leasing will give you access to higher-end properties for less money than if you bought there.
On the other hand, when you lease your property, you won’t build equity in it. In addition, every time your lease comes up for renewal, your rent is likely to increase, particularly in high-demand neighborhoods.
The Benefits of Buying
Buying a commercial property can also give your business some distinct advantages.
- You will build equity. One of the biggest advantages to buying is the equity you will build over time. You can eventually use this equity as collateral when you expand your business. You can even use it to fund your retirement.
- Your costs will remain steady. When you take out a fixed loan, your monthly payments will never increase during the loan period.
- You can depreciate your building. While you won’t be able to write off the entire cost of your property at once, the IRS allows you to depreciate it, typically over 39 years. IRS publication 946 explains the process in detail.
- You can deduct interest payments on your taxes. Unlike a lease, you won’t be able to deduct your entire monthly payment, but you can deduct your mortgage interest expense.
- You can rent out extra space. If the property is large enough, you can use it to increase your cash flow by renting out extra office space for additional monthly income.
Of course, when you purchase commercial property you will be required to pay a large down payment. Depending on your situation, that cash may be better utilized for other things, such as directly funding growth.
There is no single answer to whether you should lease or buy — you should make the decision based on your individual circumstances. If finances are your only consideration, check out this analysis, which shows that for a commercial property worth $256,000, it would cost almost $323,000 more to lease than buy over a 15-year period.
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