Join our Waitlist for Expert Advice!

Should You Rent or Buy Your Startup Headquarters? Deciding whether to rent or buy your growing startup's headquarters isn't easy. But there are three questions you can ask yourself to make the decision simpler.

By Zeynep Ilgaz Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Shutterstock

"Now where?"

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.

Related: 10 Things to Consider When Choosing a Location for Your Business

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.

Tax deductions.

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.

Related: The Best and Worst U.S. Cities for Renting Office Space

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.

Related: How Much Does It Cost to Rent an Office in Your City? (Infographic)

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.

Related: How to Live Rent-Free While Building Your Business

Zeynep Ilgaz

Entrepreneur, Co-Founder and President of Confirm Biosciences and TestCountry

Originally from Turkey, Zeynep Ilgaz and her husband immigrated to the United States with two suitcases and the drive to dive into entrepreneurship. They co-founded Confirm BioSciences and TestCountry in San Diego. Ilgaz serves as president of both. Confirm BioSciences offers service-oriented drug-testing technologies.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Starting a Business

She Started a Business With $300 After Getting Laid Off. It Made $300,000 in Year 1 and Became a Multimillion-Dollar Company.

Bobbie Racette wanted to revamp the virtual assistance space — and provide job opportunities for underrepresented communities at the same time.

Business News

Can Anyone Beat Microsoft at AI? The CEO of Salesforce Thinks His Company Can.

Salesforce CEO Marc Benioff calls Copilot "the new Microsoft Clippy."

Franchise

McDonald's Launched a Happy Meal for the 30th Anniversary of a Classic '90s Sitcom — But There's a Catch

The promotion is only available in one country, so fans elsewhere are turning to resale platforms like eBay to buy the collectible toys.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Business News

'Not Yet Fully Autonomous': Tesla's Optimus Robots Stole the Show — But Were They Actually Controlled By Humans?

Musk said the $20,000 to $30,000 robot could perform household tasks like mowing lawns and putting away groceries.

Leadership

He Raced at 330 MPH Before Taking Over the Family Business — Here's What Being in the Driver's Seat Taught Him About Leadership

Morgan Lucas, former professional drag racer, talks about getting behind the wheel of Lucas Oil as its new CEO.