Should You Lease or Buy Your Office Space?

Apart from several factors, cost can be the greatest concern, bringing up the long debate: should you lease or buy office space? In this article, we focus on which option is the most cost-effective for your business. We also touch up on other considerations that come into play to help you make this big decision for your team.

As working adults, we spend almost a quarter of our time in the workplace. To put a number into the fact, according to the Philippine Statistics Authority’s survey in 2019, Filipinos are working an average of 43.2 hours per week. The reality is, office spaces are our second home.

That is why it is crucial to find the optimal workspace for your employees. After all, they’re spending a huge chunk of their time in the place. The usual considerations include access to public transportation, dining options, and proximity to their place of residence. But the thing is, location is essential to customers as well. If you are in retail, for example, being close to your target market is necessary for business success.

The Sharing Economy

Ride-sharing, dorm-type hostels, and now, even co-working. Thanks to the sharing economy, businesses have plenty of workplace options for different budget ranges. The good thing about this is that sharing works both for when you want to lease or buy office space.

The Rise of Co-Working Spaces

Co-working spaces are designed by lessors for businesses who are maintaining a lean team but still want full access to a plethora of amenities. Years prior, only corporate giants can afford to stay at the center of business districts, offering free-flowing coffee, chef-prepared meals, the works. Now, by dividing the cost between several small- to medium-sized businesses, lessors bring the same experience at a lower cost.

Subleasing

If co-working is not within your lessor’s sights, maybe subletting is. When your team doesn’t take up much space in the work area, why not divide the portion and let another business move in? Plus points if they’re a business partner! Take advantage of that extra income and work more collaboratively—what a win-win!

Asking the Right Questions

Now, we begin looking into the differences between wanting to lease or buy office space by asking the following important questions.

What is The Space For?

Different businesses from different industries have different workplace needs. Manufacturers need warehouse space, logistics providers need plenty of parking spaces, you get the gist. Start with your why—why do you need this space—and make your succeeding decisions from your answer.

How Much is Your Budget?

The second question to ask pertains to your available capital. After all, we may want the best office space the world has to offer, but at the end of the day, our budget brings us back to perspective. Considering your credit standing and projected cash flows, how much can you afford to spend on your workplace?

After you pinpoint your what and how much, it’s time to dive deep into the leasing vs buying debate. Here’s a tip: list down your non-negotiables. Maybe you need this much seating capacity or certain proximity from your customers and suppliers. Keep these factors in mind as you go through the following pros and cons.

To Lease or To Buy Office Space? That is the Question

The Ups and Downs of Buying

Buying a commercial space means exactly that. When you find a building or a land area that suits your need, you pay for it and maintain ownership. Usually, it’s necessary to get a loan to finance this purchase. This way, you can stretch out mortgage payments and keep some cash on hand for operations.

Pros

1. Asset. The land and/or building becomes your business’ asset. When the area is great, its value can appreciate over time. You can also use it as collateral when securing bank loans.
2. Long-term. Buying means thinking ahead. After paying for the property, your business owns it forever. There’s no need to pay for a monthly lease.
3. Absolute Control. Having no lessor means you can do whatever you want with the space (as long as it’s following zoning protocols). You can construct a building, build a parking garage, redecorate, you name it. Buying means you have the capacity to build the best working experience for your employees and purchase experience for your customers.
4. Tax Benefits. Depreciation expenses and interest expenses (if you took up a loan) are put up against income to minimize tax payments.

Cons

1. Huge Initial Spending. Purchasing a property usually requires a downpayment (think 20% of the total price). This is something your business has to shell out prior to the mortgage. If you’re still starting out, spending a huge amount of money against capital might not be the best idea.
2. Loan Application. As mentioned above, buying a commercial space almost always requires taking up a loan involving monthly amortization. If your credit rating is not yet established, you will get a hard time looking for a lender, or worse, you will have to shoulder higher interest payments.
3. Decreases in Asset Value. It’s great if the value of the property rises over time. But what if it doesn’t? Decreases in property value affect your balance sheet. When you’re on a lease, there’s no need to worry about value fluctuations—your lessor is the one who takes the hit.
4. Maintenance, Security, Insurance. With great power (in this case, control) comes great responsibility. As the property owner, you will should all costs necessary to maintain the building.

The Ups and Downs of Leasing

Pros

1. Spread Cash Flow. When buying an office space, you need to pay for a huge downpayment. When leasing, on the other hand, you only need to pay for a couple of months’ deposit. Afterward, you simply settle your lease payments as long as you’re using the space.
2. Tax Benefits. Rent expense is tax-deductible! Unfortunately, it is a common occurrence for several businesses in the country to pass up on this opportunity. For some, it’s simply because they fail to ask for a receipt. For others, their lessor cannot provide one. Make sure to discuss this with your lessor should you choose to go the leasing route.
3. Mobility. Being on a lease means you can move when you want or need to. Whether for expansion or a better location, as soon as your contract ends, you can immediately move to another space.
4. Lessor Handles Maintenance, Security, Insurance. As a lessee, there’s no need to stress about maintaining the property—your lessor does that for you. Some even provide security, housekeeping, and more included in the monthly fee. The only downside to this is when your lessor is indifferent with their responsibility.
5. No Need to Take Up a Loan. Lease payments are paid on a monthly basis, so there’s no need to take up a loan unlike when you decide on buying.
6. Decreases in Asset Value. As mentioned earlier, your lessor shoulders drops in asset value. When this happens, your lease payments for the next contract period can possibly drop as well.
7. Afford Better Location. Since leasing is cheaper in the short- to medium-term, you can probably afford a better location than when buying a space. Then again, this depends on your use for the space. If it’s for a manufacturing plant, there’s no need to be in the center of the business district, right? If it’s for a restaurant, then being as near as possible to your target audience is a huge plus.

Cons

1. More Expensive in the Long Run. If you are staying in the same location for 10, even 20 years, the sum of your lease payments can be greater than buying the property itself.
2. Lessor Rules and Regulations. Most lessors enforce certain rules with how you can use the space. Some simply enforce dress codes, while some prohibit renovations. This greatly depends on your leasing agreement.
3. Increase in Costs. Lease payments usually increase every time you renew your contract. If you really like the space and have already made significant improvements, you will have no choice but to shoulder the higher costs.

Summary: Lease or Buy Office Space?

After weighing the pros and cons of the two choices, which do you think works best for your business? Really, there’s no cookie-cutter answer to the leasing vs buying question. In the end, it all depends on your business’ needs and financial capacity.