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Should Startups Buy or Rent their Place of Business?

As a small business owner, you’re bound to make numerous decisions every day. One important decision that almost every small business owner needs to make is whether to buy or rent the office space. With interest rates at an all-time low, several small business owners are reconsidering their leases because buying a property will allow them to gain some equity.

Investing in an office space can be great, but you need to consider a number of factors before deciding whether to buy or rent a commercial property. Businesses grow in phases and this is especially true for small businesses. You may start with a team of ten employees, but you may recruit 20 employees a year later as your startup grows. Space requirements, therefore, differ at every stage of growth.

Experts say that you must consider the pivot-ability of your business, its financial stability, and the current and future value of your assets to make an informed decision. However, a few other factors need to be factored as well in order to arrive at the best decision, especially with reference your fixed assets with recurring expenses, such as your property:

1. Adaptability of Your Business

A business’s requirements change as it grows. Every business must be able to adapt to these changes in order to stay relevant and consistent. This means purchasing commercial space may tie you down in the long term. Companies in the initial growth phase may face this problem, but for companies that have reached a certain level of development, purchasing property might make more sense than renting.

2. Your Financial Status

Commercial real estate is a lot more expensive than residential real estate, which is why your business needs to first achieve financial stability in order to stick to such a commitment. Small businesses often need to invest in new technology, hiring skilled candidates and improving in-house infrastructure. Purchasing, therefore, may not be a suitable option. Buying property is suitable for businesses that can sustain themselves even after putting away a huge chunk of money in a non-liquid asset.

3. Market Conditions

Investing in commercial real estate can be beneficial, but only if you invest in the right property at the right time. This is because the real estate market is extremely volatile; it depends on other markets as well as government regulations, which are bound to change frequently or vary a great deal. You may get stuck with your investment, which is a major risk.

Let us now look at the pros and cons of buying and renting an office space so that you can make the best decision.

Pros and Cons of Buying Office Space

Pros

  • Tax benefits: Businesses are eligible to receive tax benefits if they invest in commercial real estate. Tax deductions are available in the form of property taxes, mortgage interests, and others.
  • Fixed costs: You have a clear idea about the monthly expenses when you own a property. This includes mortgage payments, maintenance costs, and so on. Thus, you need not worry about fluctuating monthly expenses.
  • Additional income: If you invest in a larger space (than required), you can rent the extra space and get additional cash flow every month. The additional income can be used for the maintenance of the property or to pay a part of the mortgage premium.
  • More options: If you own the property, you can do anything you like with it. You can renovate the space, make additions, rent out a part, make structural changes, and basically make quicker decisions on using it for business.
  • Better returns: The appreciation rate of commercial properties is often higher compared to residential properties. So, by investing in one you can get good returns.

Cons

  • No flexibility: Business requirements change with time, which is why you may need to shift your office often. This means you need to invest a lot of time looking for new office spaces and finding new buyers.
  • Upfront costs: Buying costs more than renting. Major upfront costs include down payments, improvements to the property (if required), maintenance deposits, and so on.

Pros and Cons of Renting Office Space

Pros

  • Prime property at affordable price: If you choose to rent your office space, you can access the best of properties at affordable rates. You can rent a property at your desired location within your budget.
  • No upfront costs: There are no upfront costs to be paid if you rent a property. No mortgages or personal guarantees required either, so you can get going about your business quicker with less budget.
  • Higher flexibility: With renting comes flexibility. You can rent any type of property at any location and stay within your budget. You can also move offices quickly without having to worry about selling the property.
  • No maintenance hassles: You need not worry about the maintenance of the property; that responsibility lies with the property owner.

Cons

  • Fluctuating costs: Renting is subject to annual rent increases, so the cost may go up each year.
  • No equity: You do not get anything back for the money you pay every month; instead you make someone else richer.
  • No ownership rights: You do not have any right to make changes to the property and are restricted in the ways you can uses it. You need to follow the rules laid down by your landlord. If you fail to do so, you may have to face legal consequences.

The Wrap

Whether you decide to rent or buy, finding the right property is crucial since it can affect your business in several ways. It is, therefore, important that you research properties and then invest in them. With the help of country-specific online real estate marketplaces and property records resources such as Arivify, you can quickly research great properties and get the necessary details that will help you make an informed decision.

Every business is different and so are its requirements. You need to evaluate your business needs and then choose a suitable option. Making the right decision can often be overwhelming, so don’t hesitate to involve your financial planner, senior management, and other people you trust to help you make the right decision.

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