October 10, 2017
If you’re a startup founder, raising capital and getting your business off the ground the first major hurdle. There are countless decisions that need to be made daily in order to bring your product or service to market. One decision that is often overlooked, at least until they are later stage startups, is whether to rent or buy your office space.
Most startups don’t think twice and jump immediately into the rental market. But there are some distinct benefits that buying commercial real estate offers and renters miss out on. The best way to make the decision is to decide what you can handle both short term and long term. Consider your individual real estate market and the stage of your business.
Here are six reasons that as a startup, you should opt to purchase your office space rather than rent it:
- You Get to Be the Landlord. Being your own landlord has its advantages. You don’t have to worry about your rent going up or lease agreements changing. Plus, you set all the rules. You can change the property however you see fit without having to ask for anyone’s permission. You can renovate the space or rent part of it out for additional cash flow. You can shape your space to fit your brand, your ideas, and your team.
- It Costs More to Rent. In some markets, the cost of rent exceeds the cost of purchasing property. You may be able to actually lengthen your runway by investing in your office space. That’s why we recommend that you carefully examine your individual market and weigh the pros and cons of buying versus renting. Look at the numbers from both a short-term as well as a long-term perspective. Buying property is almost always a better long-term investment and it may be better for your company in the short term as well. (ahem, you could save on moving costs down the road, too).
- You Can Focus on the Long-Term. There are two main reasons most startups go straight to renting: they don’t want to be distracted from their main mission and their investors didn’t fund them to get into real estate. So if you’re trying to grow users to get to your next funding round, it probably isn’t a good idea add any commercial real estate to your balance sheet. But, if you have the time and energy to take it on and are able to look 5+ years into the future, it starts to look like a good idea.
- Cash Flow Isn’t a Problem. When you’re cash flow positive (or are growing quickly and can easily attract investors), there are distinct advantages to owning rather than renting. Buying property is a long-term investment that allows you to build equity, which you can use as collateral for future growth. Commercial real estate appreciates in value, so if you choose to sell in the future, you could potentially make a solid return on the property. And, if you invest in a larger property and can attract tenants, their monthly rental payments will be a nice, steady source of income.
- Tax Benefits Exist. Tax benefits are available to businesses that invest in commercial real estate. As a property owner, you can receive tax deductions for property taxes, mortgage interest, and other costs associated with purchasing and managing the property. And if your business grows too fast and you outgrow your space, you can use a 1031 exchange to upgrade your space without paying taxes on increased value.
As a startup, the decision to buy or rent office space is tougher than many think. We get it. But it’s important to know your options. You may just be surprised at how purchasing your office space could be more cost-effective and while contributing to your ongoing success.