Many business owners are confronted with the dilemma: should they buy or lease their office building?
Depending on the business owner and their long-term goals, this answer can vary. However, for those who are looking to operate in their local market for years to come, owning is generally a better option. Most business owners are hesitant to entertain this option because of the upfront costs of purchasing an office building.
Unfortunately, when they avoid the option out of fear, they also overlook the benefits of owning versus leasing. Let’s take a closer look at some of the benefits:
1. Build Equity
Every month you pay rent, you're literally handing your hard-earned money to another investor – your landlord. This is the trap of leasing. The payments offer no benefit to you, the business operator, other than providing you a space to run your business.
On the contrary, if you own the building, you are building equity while you pay your rent. This means that every dollar spent on rent will be put right back into your pocket. Over the years, you will be building equity from your commercial asset.
2. Fixed Costs
No need to fear the rent increases from the landlord because when you own, you are the landlord.
When starting a business, or even just moving office spaces, finding the right space within your budget is a necessity. This can often be a challenge, however, especially when the lease agreement usually includes a clause that permits the landlord to implement 3-5% annual increase during your rental period. Owning your own space can provide you security that your rent amount will remain stable.
3. Depreciation and Appreciation
That’s right – you can benefit from both! When you own your property, according to the tax laws, your property depreciates in value; therefore your property taxes will reduce annually. However, if you purchase in the right market, more often than not your property actually increases in value, ultimately allowing you to build your equity at an expedited rate.
When you lease an office space as a business owner, though, you gain no advantages from property depreciation or appreciation. In fact, you only help your landlord build their equity and wealth for their future.
Get the look you want without the hassle. If you have ever signed a lease for an office space, then you have reviewed the clauses in that lease. They usually include restrictions on what you can and can’t do with the identified office space. This unfortunately puts a restraint on the image that you are trying to portray to your clients. And in today’s world, image is everything.
Take, for example, a company that promotes an eco-friendly business, but their landlord restricts the upgrades in their office building to match their needs. This means that when a potential client enters the office, they may notice that the business is not living up to their expectations, and could even result in that business losing the client.
This is just one example – but there are many more that can hinder business operations. When you buy your office, you’re also buying the freedom to match your office to the image you want to portray – no limitations.
5. Additional Income
When you lease a space, you have no opportunities for additional income outside of what your business generates. This means that if your business is struggling, your rent will remain the same – your landlord generally will not reduce your rent because of reduced profit margins.
However, when you own your office building, you can adjust your monthly rent according to the success of the business at any specific time. Additionally, you will have an opportunity to generate supplementary income for when your business is either experiencing a negative dip in the market, or when you are just looking for financial assistance to help your business grow.
Either way, extra income when you own your office building is one unique advantage of owning versus leasing.
6. Tax Benefits
Save money on taxes. To do this, you will need to set up your business entity separate from your property ownership entity.
By structuring the business and asset this way, you will gain the advantage of owning your office building. When you rent a space, the rent is tax deductible for the operating business.
As the property owner, you will benefit from the tax deduction on the interest on your mortgage loan, as well as the annual depreciation deductions on property taxes mentioned previously. You save more as the landlord and the tenant.
Learn More about owning an office building
This is just a brief outline of the benefits of buying versus leasing.
Nevertheless, there are many more factors that a business should consider when determining which avenue is best suited for their future.
At, WindWater Real Estate, we understand the pros and cons of each option and would be happy to provide you with any information to assist you in making an educated decision.
To learn more, contact us today.