That’s a question many founders ask themselves after they prove their concepts and discover they need more space than their garages, basements or living rooms have to offer.
Choosing the location of your growing startup’s headquarters isn’t an easy task -- and in today’s real estate market, deciding whether to buy or rent can be equally difficult. In 2015, 2.45 million jobs were created; as a result, growing businesses across the nation are searching for new digs. This has resulted in a competitive market.
According to a recent National Association of Realtors report, the demand for commercial office space continues to trend upward while supply struggles to keep pace.
Evaluating the pros and cons of renting and buying before making such a major financial decision is vital. Here are a few things to keep in mind:
Down payments vs. deposits.
Buying is a long-term commitment. It requires a hefty down payment that can range from 20 to 25 percent and is best suited for businesses with adequate financial resources. Leasing is a short-term commitment. Typically, you put down a refundable deposit, and your cash flow becomes working capital.
Flexibility vs. equity.
Leases provide annual flexibility that allows you to move in and out with ease. Purchased property isn’t nearly as flexible, but it allows you to build equity that can be used as collateral for future expansion.
You might be able to enjoy tax deductions from the associated costs of owning your own commercial space, such as mortgage interest and property taxes. If you rent, your monthly payments are typically tax-deductible as a business expense.
Only you know your startup’s freedoms and limitations. Before you ask, “Now where?” ask yourself these three questions:
1. Are my finances in order?
A lot of ink has been spilled over choosing a geographic location, but before you consider that, construct a financial analysis of your startup to gain fiscal clarity. Without it, you won’t be able to evaluate cash flow or predict industry fluctuations.
With those results in mind, you need to consider whether renting or buying is a more financially responsible decision. In some cities, rent can cost less than $2 per square foot, but in others, you could find yourself paying upward of $5. That might make buying seem like a better option, but you should also keep in mind that purchasing a building is an ongoing investment that doesn’t end with the first down payment. Additional costs will inevitably crop up, including building renovations, monthly maintenance, insurance and taxes.
2. Am I prepared to scale?
Recent research shows that the No. 1 cause of startup death is premature scaling. If you’re expecting sudden growth or downsizing, reconsider the move. The last thing you want is to invest time and money into a building that will only be short-term.
Closing a commercial real estate deal is a long process that can take more than twice as long as a residential deal. You’ll have to spend time away from work to tend to things such as the building search, the negotiation process and the loan approval. Is your staff equipped to handle your absence?
3. Would I rather have a landlord or be a landlord?
Whether it’s a broken light bulb or a heating system that stops working, you’ll be responsible for all maintenance issues if you own your office space. These costs can really add up, and they appear to be rising. According to one study, operating expenses for commercial properties increased 6.1 percent from 2013 to 2014.
However, a startup that owns its office can rent out portions of it for extra income. This could be especially profitable, as recent studies show that most workplaces are utilized less than 45 percent of the time.
As an entrepreneur, I know investing in office space is a difficult decision. But if you closely analyze your finances and your market, you can easily make the best financial move for your growing startup.