Rent or Buy Office Property: 7 Questions to Ask Yourself

Friday, August 17, 2007 at 9:00pm by Site Administrator

Not all entrepreneurs and startup businesses are launched out of a spare room or garage. There are times when having a “real” office is more appropriate. If this is an office you’d like to have long-term, you might be wondering whether it’s worth buying or renting.

A few questions to ask yourself:

  1. Necessity.
    Do you really want a mortgage? Is it absolutely necessary? Do you know why you really want to buy property rather than rent an office?

  2. Business value.
    Can you write off enough of the mortgage to make it worthwhile over renting? If you’re running a business, you should be able to write off rent as well.

  3. Business value, part 2.
    Is there any overwhelming reason that once you set up your business office, that you have to stay there long-term? If not, then renting leaves more option for moving later.

  4. Affordability.
    Can you afford the mortage? Obviously, if it’s not about the same as if you rent, you have an added financial burden that a startup business doesn’t need.

  5. Property taxes.
    Have you factored in property taxes and the fact that they’re paid quarterly in most cities? With rent, it’s incorporated and isn’t a surprise each quarter.

  6. Incidental costs.
    What about heat, hydro, etc., costs? Have you accounted for these in your operating budget?

  7. Maintenance costs.
    For example, if you live in area that has snow, you might be responsible for clearing it within the permiter of your property, else be liable for accidents and injuries. And what about the cost of repairs, plumbing problems, etc.


Convenience

Another consideration, if you’re choosing an office over working out of the house, is break time. When you’re at home, it’s easy to take a quick nap after a long day, then get back to work. It’s a little bit harder at an office. And since startup entrepreneurs are often trying to wear every hat instead of delegating tasks, they’re usually easily worn out.

Type of Office

If you decide that buying is still worthwhile, there’s still the question of what type of property? A work/ live studio might be your ideal office type. Then again, if your workspace is too comfortable, is there a temptation to goof off? If not, a work/live studio or a loft that you can have customized are good for a startup. There’s just enough professional atmosphere to get buy, and there’s living space as well. The fact that you might be in an old warehouse can lend a quaint atmosphere. [I know that in Toronto, Canada, for example, it's been hip for a long time to create startups in old warehouse lofts. And there are lots of those in the Big Smoke.]

How Much Down?

I know someone who is self-employed and went from renting a house at $1500/m to a mortgage at much more than that. He used his rental home for his business office as well, which he’s also doing with the new place. Was it a good move? I don’t know. He seems to be fine with it, despite the additional cost. However, his business has been around for 10 years and is well-established. He’s good at saving money, and always builds a sufficient down payment before buying, even if he’s buying just a car.

If you think you can manage a mortgage, your necessary down playment will vary. Sure, there are nothing-down situations, but let’s not get into that. (Doing it wrong can bankrupt you; I’ve seen it happen to people I know well.) Obviously, the more you save up the better. But if you cannot save up at least 10%, if not 20%, in down payment, you probably don’t want to buy. You just end up with a lot of debt. Personally, I wouldn’t buy a property until I had at least 30-40% down. But that’s just me – lessons learned from lots of business mistakes.

How’s the Market?

An Oprah show segment earlier this week highlighted that in the U.S., there’s a downturn in the real estate market. It’s currently a buyer’s market. Still, that doesn’t mean you should buy, if can’t answer yes to most of the seven questions above.

Alternatives

If you live in most English-speaking countries other than Canada, you can get at least 4.5% interest for an Online Savings Account (OSA). (In Canada, it’s less.) Sticking your down payment into an account should generate enough money to make a dent into your regular rental cost. For example, 5% on every $10,000 is about $500 per year in interest, or under $50/month. So if you have $30,000 in down payment saved up, that’s roughly $150/mth in interest, which you could apply towards the cost of renting instead of buying.

Conclusion

Ultimately, you have to do what’s best for your business, and there are complex factors that determine that. But if you truly follow the bootstrapper credo, buying anything when it’s not absolutely necessary yet is just plain financially bad.


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2 Comments »

  1. Raj:

    Rent or own, isn’t the big question these days? Cars, computers, and well, one might add, lifestyles. Thanks for taking us on a brief tour of the pros and cons of office space. I cross-posted on your piece to http://blog.innovators-network.org
    The Innovators Network is a non-profit dedicated to bringing technology to startups, small businesses, non-profits, venture capitalists and intellectual property experts. Please visit us and help grown our community!

    Best wishes for continued success,

    Anthony Kuhn
    Innovators Network

    Comment by Anthony Kuhn — August 22, 2007 @ 10:37 pm

  2. Thanks for dropping by Anthony, and for the link nod.

    Comment by Raj Dash — August 22, 2007 @ 11:09 pm

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