For most businesses, office space is a necessity. When faced with the possibility of leasing or buying, how should your business decide which is better? Making this decision can be a daunting task, as many factors, both in and out of the business itself, must be carefully weighed and analyzed before a final decision is made. Before making a move, consider the following five questions:
Buying is a long-term commitment. Before purchasing an office space, companies need to weigh the possibilities of business growth or shrinkage. If a company is expecting greater market demand to fuel an expansion, they must consider their future plans when purchasing a property. Undoubtedly, it can be difficult to forecast future space demands, even with estimated growth projections. However, it is also worth considering the risk of not recovering an investment when attempting to sell, as well as the logistics of covering a mortgage while moving to a new location if your building doesn’t sell as fast as expected. If estimated correctly, buying a property can make business growth somewhat easier and more organic. If you own the whole building, expanding across the hall can be easier than searching for a new building.
On the other hand, renting can relieve the pressure of intense forecasting, mitigate the risks of forecasting incorrectly and allow for greater flexibility. If the upcoming years are difficult to predict with certainty, leasing may be a better option. For businesses evolving or more interested in multiplying in new locations, leasing can prove conveniently malleable. It can be less daunting to outgrow a rental property than be financially engulfed by an overly large space.
Where would your funds be best utilized? Could you see a greater return by channeling funds back into your business, or would a long term property investment offer greater return? If your field is experiencing heightened growth and demand, focusing on innovation and internal investments may be a top priority for succeeding in your industry. Would now be a better time to invest in new technology or employee training? Before purchasing or leasing, determine whether immediate capital would be more productively channeled into your business or a property purchase. Times of change and growth may warrant greater focus on development and strategy, making a lease the best option.
Depending on your industry and clientele, the optimal length of time to remain in one location may vary. Knowing the importance of proximity to your customers and competitors will help you decide whether renting or owning offers a better strategy. If new markets for your services are emerging, and the work clusters of companies within your industry are somewhat mobile, leasing may offer a more flexible and adaptable strategy for maintaining the most competitive locations. However, if your market is anchored in a stable location, buying may be a viable option for long-term savings as long as property values rise.
Downturns in the market are the best time to buy properties inexpensively, but for many businesses hoping to work in areas already in high demand, finding an affordable property can be difficult. Leasing in a high image area is often more cost effective than buying if property prices have already skyrocketed. If you have security or technological requirements, finding property for sale in high image areas may also prove challenging. Leasing can usually provide businesses with their desired location and setting. Location is frequently key to a successful business, and proximity and visibility to clients and collaborators can make the all the difference.
Purchasing in surrounding areas where lower cost per square foot may be available could be an option for some businesses for whom location is a lower priority.
If an ideal property is available to meet your specifications over the long term, buying property in a high demand market could pay off as market values rise. Businesses must consider which option is most likely to provide less risk and higher return for their specific needs, and whether waiting a few years would be a better decision.
To assist inunderstanding the financial risks and benefits of purchasing an office space, a cash flow analysis should be performed. By understanding the timing of cash flows, businesses can gather a more detailed projection of revenue income and availability. A thorough net present value cash flow analysis will include predictions on future holding periods, property appreciation values and rental increases, interest rates, and other expected expenses. It is a good idea to create multiple analyses for possible levels of success: optimistic, realistic, and pessimistic. Although more work, the outcomes of each analysis might provide more realistic economic margins for decision making.
Recognizing the current and predicted stages of your business is key to making informed property choices. A smart decision can significantly impact the future success of your business for years to come. Do not hesitate to gather legal opinions and property advice before taking your next step.