Once you decide to move your home office to an external location, you have two choices to make: whether leasing or buying works best for you; and what type of office space works with your business needs.

Buy or Lease?

The biggest consideration between buying or leasing office space is your cash-flow situation. Normally, leasing requires less money upfront – a fact that tends to appeal to folks just starting out.  But there are advantages and disadvantages to each option:

Buying Benefits

  • Fixed costs. Besides locking in a long-term commercial mortgage, you won’t be dealing with rent increases.
  • Tax deductions. Owners can usually deduct the full amount of mortgage payments, with repairs written off immediately.
  • Extra income. You may be able to lease out a portion of the building if you determine that you have excess space.
  • Control. If you need to make substantial changes to the building to accommodate your business, you own those changes, not your landlord. Business hours are up to you, and you can remain in your location indefinitely.
  • Future sale. You could benefit financially if you sell in a good real estate market.

Buying Drawbacks

  • Upfront costs. Buying commercial space may initially cost far more up front than leasing. Property, appraisal and maintenance costs, along with a large down payment and potential improvement costs, may also be concerns.
  • Lack of flexibility. If you outgrow your space or have to downsize, you may be forced to sell.
  • Variable real estate market. Should you decide to sell, economic downswings could force you to accept a lower price, if you receive any viable offers at all.

Leasing Benefits

  • Prime property. Leasing office space may give you a chance to rent in an area with a good location and high-end image at affordable prices.
  • Free-up working capital. With your money not tied up in real estate, your business may be better able to respond to opportunities in the market.
  • Easier to qualify. A strong credit rating is not quite as critical for leasing as it would be for buying. This can be a big plus for start-ups and small businesses.
  • Tax deductions. Your monthly lease payment is tax deductible because it’s a business expense.
  • Freedom. You can sublet and move to another location if you need or want to, minus the hassle of selling before you can relocate. Even more importantly, you run no loss risk in a bad real estate market.
  • More time. You’ll be free from the headaches and cost of maintaining your own building, with more time to run your business.

Leasing Drawbacks

  • Variable costs. You may be subject to annual rent increases and higher costs when your lease expires.
  • Non-renewal. There’s no guarantee you’ll be able to renew your lease when the term expires.
  • Broken lease. It’s usually possible to break a lease if the landlord and tenant agree in writing. Still, a standard agreement means either party can terminate the lease by giving notice within a set period of time. As a tenant breaking an agreement, you can be made liable for rental costs for a prescribed time period – for example, six months or a year.
  • Lack of equity. Your lease payments build your landlord’s equity, not your own.
  • Lack of control. You may not be able to modify the space to your liking and may have the headache of a troublesome landlord.

Virtual Offices and Executive Suites

If the permanence of ownership or long-term leasing doesn’t appeal to you, a virtual office or executive suite may be viable options.

A virtual office provides communication services such as phone, fax, email and answering service support from a remote location, while also providing a physical address to which customers and vendors can send mail and packages. The office is “virtual” because you never occupy the space, yet have crucial administrative support.

On the other hand, an executive suite is office space, often including the use of shared conference rooms and other facilities, leased by businesses who want to maintain a professional image while only using a portion of the total space available. Tenants often share a receptionist as well as office equipment and other support services. Some executive suites even rent offices or rooms by the hour to home-based businesses or other people who need temporary space.

Whether you decide to lease or buy, or choose a virtual office or executive suite, it pays to consider both your short-term and long-term needs in order to find the right home for your business.

 

The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.