Renting vs. Buying Office Space: Pros, Cons and Tips

by Corporate Relations & Business Strategy and Communications Staff

If your lease is up soon, the size of your practice has recently changed, or you’re just starting a practice, you may be looking for new office space. In addition to location, size and amenities, a key consideration in contemplating a move is whether to buy or rent.

To make a decision that best fits your practice, consult your financial advisor having reviewed the following potential pros and cons, as well as tips about each option.

Pros

• Renting offers maximum flexibility. When you rent office space, you aren’t tied to the location, square footage or monthly payment for longer than the length of the lease. If you don’t plan to stay in a location for more than a year or two, or if you expect your office needs to change, renting may be your preferred option.

• Renting requires minimum property maintenance.

• Depending on the market, renting may allow you to establish your practice in a desirable location that you couldn’t otherwise afford.

• If your practice is part-time, you can share the cost of the space with other practitioners.

• Renting can put you in proximity with other specialists. For example, if you rent space in a medical office building, you may have the opportunity to develop relationships that grow your practice.

Cons

• As a renter, you don’t build equity in the property.

• Your rent is likely to increase over time.

• You may have to deal with a difficult or unreliable landlord.

Tips

• Have your lawyer review the lease before you sign it to make sure you are adequately protected against unreasonable or unexpected expenses or responsibilities.

• Make sure the lease specifies the landlord’s maintenance responsibilities — usually the most costly items such as the building’s structural, plumbing and electrical systems — as well as your maintenance responsibilities.

• You may seek additional terms in the lease, such as a death and disability provision that allows for termination of the lease in the event you or your business partner are unable to practice, or an exclusivity provision that forbids the landlord from renting space to another practitioner in your area of practice.

• Make sure you know the details about terminating your lease so you can give adequate notice when you intend to leave.

Pros

• For most practitioners, the appeal of buying office space lies in the potential to build equity in the property. Over the long term, if the property appreciates in value, the office may become a good investment vehicle.

• You may also benefit financially by renting to a tenant unused space in a property you purchase. This provides an additional income stream to fund the mortgage or other expenses. Some practitioners buy more space than they need and rent out the extra space until their practice expands to fit it. Others rent out unused space if the practice decreases in size and they don’t want to move to a new location.

• Unlike renting, there are fewer restrictions on remodeling, upgrading or decorating the space.

Cons

• As an owner, you are responsible for property maintenance, which requires an investment of time and money whether you take on this task yourself or hire a property manager.

• You will have to pay taxes on the property.

• While buying office space can provide financial benefits, beware of potential financial pitfalls. For example, if a building declines in value, or if you need to sell and you can’t find a buyer, you could lose money in the deal.

Tips

• Work with a real estate agent who knows the area and the local real estate market.

• Consult your attorney and accountant regarding the financial, tax and legal implications of purchasing commercial real estate.

• Before deciding to rent or buy, research what properties are available in your area. Compare the costs and the features of buildings in your preferred location. If rents are high and interest rates are low, you may decide that purchasing office space is a better option for you financially than renting.

• Additionally, evaluate your cash flow situation. Buying office space can require a significant cash outlay upfront. You may not have the cash for the down payment or want to tie up your cash in real estate.

• Depending on the legal structure of your practice, you may need to amend your legal partnership agreement to include jointly owned property.

• Be careful how to finance the mortgage. Interest rates can drastically affect your monthly payments. Work with a lender to find a mortgage structure that takes advantage of competitive interest rates and protects you from potential rate increases.

The decision to rent or buy should take into account your business plan, the real estate market in your area, and your practice’s finances. Before signing on the dotted line, make sure your decision fits into your long-term goals.