Should I buy or lease office space?
Similar to choosing a place to live, you have options when setting up your business location. And the biggest decision could be whether to buy or lease an office space.
In most cases, it’s not a straightforward decision since there are different tax rules and financial considerations to take into account when running a business — especially if you’re just starting out. There are also many buildings, office complexes and locations to explore, whether it’s taking advantage of the buzz around the revitalization of downtown Winnipeg, finding space in other neighbourhoods in the city or looking for options in our many rural Manitoba communities.
Before you sign on the dotted line, here are some pros and cons of each approach:
Consider your business wants vs. needs
First off, consider the type of business and industry you’re in. If you’re a customer-facing business, like a restaurant or retail shop, your location should make it easy for customers to find you. If you’re in design and manufacturing, location may be less important than finding a large, flexible space. And if you need to hire staff, consider how the location will impact your ability to find and retain skilled employees.
Also consider your business goals, such as future growth and expansion. If you’re a new business, you may be planning to eventually expand your operations. That means you need a space that can accommodate growth or the ability to pack up and move to a larger facility. Depending on your business, the space may need modifications or renovations, which will require more upfront capital.
Then, of course, is the issue of cash flow. Buying requires more upfront capital than leasing, but leasing has less predictable costs. There are also tax implications, which are complex (and hard to generalize), which is why you should always seek the advice of your accountant and financial advisor.
Advantages of leasing an office space
Leasing is a good option if you expect your business to expand in the next couple of years and you may need to relocate. It also allows you to rent space in a neighbourhood that might otherwise be prohibitively expensive.
You will likely only need to pay first and last month’s rent, and your landlord takes care of maintenance and repairs, so you can focus on your business — not the plumbing. And, if you do need to make modifications to the space, you can amortize the cost over the course of your lease.
When leasing, your cash outlay is much lower. That means you free up working capital, which can help you expand the business or take advantage of new opportunities.
Disadvantages of leasing an office space
While there are a lot of pros to leasing, you don’t build up equity, and you’re at the mercy of your landlord. You’re subject to annual rent increases and, when it comes time to renew your lease, you can expect to pay more — but you probably won’t know how much more, making it harder to budget.
However, you can still make estimates based on available data. According to Canadian Real Estate Wealth, “the average price of commercial rent on the national level has gone up about 1% per year for the past five years.” That said, warehouse and office space were actually closer to a 4.5% increase between January 2019 and September 2021, much higher than other industries. And they note that “commercial rents in the retail sector have actually gone down over the last two years.”
An increase in property value, for example, could lead to a big jump in your rental rate, which has driven many businesses out of gentrifying neighbourhoods.
You’re also reliant on your landlord for maintenance and repairs — and they may not fix things as quickly as you’d like, or the quality may not be up to your standard. They might also have rules about the use of the space.
Keep in mind, too, that landlords can change. Even if you like your landlord, you may not get along as well with the next one.
Advantages of buying an office space
Unlike leasing, buying commercial space allows you to build equity, which you can then use as collateral should you want to get a loan or expand your business. You also have predictable mortgage payments, which helps with budgeting. And, you don’t need permission to make modifications or renovations to the building (aside from municipal permits, of course).
At the same time, the property will (most likely) appreciate. As it appreciates over time, you could sell it to fund your retirement years. You could also consider renting out part of the space if you don’t currently need it, bringing in additional revenue — and setting you up for future expansion.
Disadvantages of buying an office space
There’s one obvious disadvantage to buying commercial space: the down payment. You’ll pay typically between 10 to 25% of the purchase price (in part, determined by your credit history), which is a significant chunk of change. Plus, you need to take other expenses into account, such as property taxes and maintenance costs. You’re also subject to the whims of the real estate market. For example, if you need to relocate, it may not be the optimal time to sell.
If you don’t have a lot of extra cash lying around, buying a property means you’ll have less to invest in other parts of the business. You also become a property manager, which may or may not be something you’re interested in.
Ultimately, the decision could come down to location, factoring in whether that area will attract customers for the long-term. And of course, you’ll need to consider whether brick-and-mortar office space is needed for your business or industry in the same way as it was pre-pandemic.
If you’re a new or early-stage business and the price of real estate is simply too high in a prime location, leasing may be your best option. But if location is less important, or real estate is reasonable, you’ll have to weigh the pros and cons of each approach.
The final decision to buy or lease office space
To help you make a confident decision, crunch the numbers and look at the data. As with any real estate transaction, emotions can come into play, but it’s important to stay objective. By making accurate calculations on your current finances and future cash flows, along with other projections and costs analysis, you’ll be in a better position to make a confident decision.
As with any decision of this magnitude, it’s well worth having a discussion with your business services professionals including your ACU financial advisor to understand how you can make an informed decision at your business stage.
If you’re ready to take the next step in business financing to buy or lease an office space, set up an appointment with an ACU Business Account Manager today. We’d be happy to discuss your options and help you get the space you need to grow your business.
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