Renting or Buying for Startups

As businesses grow, they often find that they need more space. Startups may reach a point where working from their garages, or living rooms are no longer sustainable or don’t offer space or a conducive working environment. 

If you find yourself in this scenario, you may be wondering whether or not you should be renting or purchasing property for your business. There are many variables to consider and doing your research as well as a  business case analysis is of the utmost importance.

But choosing the location for your growing business may not be as easy as you anticipated. Taking today’s real estate market into consideration, the choice to buy or rent may not be as straightforward. 

As we approach the end of 2021, many people are longing to get out of the house again and enjoy a workspace with physical meetings. Hopefully, with many nations getting closer to achieving vaccination goals, the time to relook your company space is fast approaching.

If you’re ready to start your office space planning, here are some pros and cons of renting and buying for you to consider when making this big financial decision. 

The difference between a deposit and a down payment

Renting and buying comes with two differences: a down payment and a deposit.

Purchasing property is a long-term commitment that will usually require you to have a large sum as a down payment. This amount can range from 20-25% of the property sale value and is usually only an option for companies that have sufficient capital. 

Renting, on the other hand, is a much shorter financial commitment that usually requires a tenant, the renter, to pay a refundable deposit to secure a space. In this case, your money essentially becomes working capital.

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Flexibility or equity

Depending on the country you reside in, renting a property may afford you the flexibility to move spaces fairly quickly, with lease agreements usually up for review or renewal on an annual basis (country and region dependant). A purchased property does not offer the same level of flexibility but affords business owners equity which can be utilised as collateral for expanding in the future.

Deciding whether to rent or buy property is dependent on each business case. As a startup owner, you will know what is possible from a business and financial perspective. Before diving into the important decision, whether to rent or not you should analyse your current circumstances based on these four key points:

1. Make sure that finances are healthy 

Before you even start looking at or considering renting or buying commercial property, you will need to gain the fiscal clarity of your startup. Your first step is to conduct a financial analysis. This is important for you to evaluate cash flow and make future projections on industry fluctuations. 

Based on these results, you can then weigh up what your most responsible option would be, whether to rent or buy. Of course, the location of your desired office space will have an impact on the cost compared to the value of your decisions. 

For example, rent is a lot more costly in some cities than in others. This could influence what investment approach is better for your startup. Always remember that buying property is an ongoing investment that will cost you money down the line with expenses like; renovations, maintenance, insurance, and taxes.

2. Plan the scaling of your startup

Recent research indicates that the primary cause of startup failure is premature scaling. It is therefore important that you set realistic and conservative timelines for your startup. The saying ‘don’t count your chickens before they hatch’ is one to keep in mind. When you do make an investment into a building, you want to know that it is a sound one for the bigger picture. 

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3. Commercial property takes time

A commercial real estate deal takes time. The process is long and can take more than double the time as a residential deal would. Factor in that the process for buying a commercial property will require you to spend time ‘out of office’ to find the right building, negotiate with agents, and obtain a loan and mortgage approval with banks. You will want to have peace of mind that the rest of your team is independent enough to keep your business running smoothly while you’re busy.

4. To be or not to be a landlord

Being your own landlord sounds great, but that will mean that the onus is on you to take charge of any building maintenance. From every broken lightbulb to larger infrastructure issues that may occur, keep in mind that every cost will be yours to bear. Operating expenses need to be considered and reserves for unforeseen costs will need to form part of your financial planning.  

On the other hand, by owning your own office space, you can generate additional income by renting out parts of your office space to other entrepreneurs. This will depend on the space available and how best you can use it to your advantage.  

But, what if none of these options tickles your fancy? 

There is another option for when you don’t want to rent or buy, of course, and that is. making use of a coworking space. 

A coworking space allows for flexibility, you can arrive at any time that you want, make use of their meeting room, and cancel the service at any time. The best part is, there is no need for a deposit, and you usually only pay for what you use. 

So, while your startup is just starting out, consider making use of a coworking space. There is no need to pay for maintenance, and you sometimes get a free coffee included in your stay. 

In the end, as an entrepreneur, investing in office space is a difficult decision. But if you closely analyse your finances and your market, you can easily make the best financial move for your growing startup. It is important to make the right decision for your startup.

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