David Creed, Sperry Van Ness Nashville contributed this article to BusinessNewsDaily's Expert Voices: Op-Ed & Insights.
Small businesses grow in stages. What was appropriate office space in your first growth phase when you had a handful of employees may not be suitable for your current phase, which includes a team of 50. In addition to adding team members, you've learned more about your office space preferences and requirements.
Should you buy or lease your office space?
If you're like most small business owners who are calling our firm lately, that's the question on your mind. Historically low interest rates and altered accounting standards are motivating business owners in all phases of growth to rethink their leases.
I can't say I blame them. With interest rates so low, why rent when you can gain equity? Depending on the terms and equity required, investing in an office may be a great option, especially if you are able to purchase a building that offers additional rentable space to increase the return.
Simultaneously, changing accounting practices make leasing less appealing.This quarter, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are deciding on a proposed draft that if enacted, will frame leases as liabilities.
As with any decision, there are pros and cons. Looking at the basics of leasing versus buying can help you decide if you should move forward with the more in-depth financial assessment that buying requires.
Let's start with some questions. When you answer yes, chalk up a tally in the pro buying column.
- Would you be a better landlord than your current lessor? Let's face it; even the best landlords can be a problem. When you're your own landlord, you don't have to worry about property management becoming a profit center for the landlord. You have the ability to control some of your expenses, which can positively affect your investment return.
- Are you changing office locations frequently because of rental rate or common area maintenance increases? Moving takes time and money, which could both be better invested in buying a space. Not to mention it would be nice to know what your debt service will look like in the future as opposed to experiencing market fluctuations every 5-7 years.
- Does your company require specialized or hard-to-move fixtures and equipment? There's no need to constantly lug equipment from one leased space to another. It requires time, money and your patience.
- Would you rather your monthly rent payment be an investment? No one likes spending thousands of dollars every month on rent. Buying won't rid you of those monthly payments, but instead of giving that money to someone else, you are investing in an asset.
On the flipside, just because the market is currently conducive to buying, doesn't mean it's the right decision for you. If the following points sounds more in-line with your growth phase, add a mark to the con side of your list.
- Is relocation/significant expansion/downsizing slightly possible in the next few years? Buying is a commitment. Unless you're purchasing office property solely as an investment, your company's growth or downsizing expectations will play a role in your decision. For companies looking to inhabit all or a portion of an office building, you should have a firm grasp on your future space requirements before you make your office-space decision.
- Is investing in an up-and-coming or trendy area out of the question? Some businesses may need to be in a specific part of town, like the central business district, to accommodate customers and employees. Unfortunately this may eliminate the advantage of purchasing in up-and-coming areas where lower cost per square foot and appreciation may be available.
- Is your current lease structured as a full service lease? If you're currently leasing, the building manager most likely has a cleaning and maintenance crew that empties the trash, replaces light bulbs, maintains the bathroom, etc. Oftentimes potential buyers take janitorial and maintenance services for granted and forget to factor it in their buying considerations. You must be willing to take on or hire out these responsibilities if and when you buy.
- Would your equity be better placed in your business? If you only have capital for one investment, your business may be a better choice than buying a building. Similarly, your time may be better spent working on your business rather than maintaining a building.
In general, this is undoubtedly a great time to buy. If you evaluate the pros and cons of buying and decide buying is a possibility for your business, take the next step and call a realtor. You have an opportunity to get in the real estate game when prices are still low. They won't stay like this for long. Buying can diversify your investment base and potentially grow your income and your business.
The views expressed are those of the author and do not necessarily reflect the views of the publisher.