The Hidden Costs of Owning Your Office Space

Tired of paying rent? When commercial real estate prices soften, you might think it is the perfect time to buy your own office space. But before you call an agent, remember that owning vs. renting is not a simple decision that can be made without many issues to consider.

Being an office owner can be a terrific feeling: Paint the walls, rip up the carpet, and make your space reflect your corporate culture and who you are. But owning an office, or any real estate, is also a distraction. So if you have concerns such as roof repairs and taxes, all the warm fuzzies in the world won’t make up for them.

Here are the top questions to consider before making the leap from tenant to landlord:

• Can you afford the time? Plenty of business owners would rather be driving around with a real estate agent than sitting at their desks. But your business isn’t growing while you are away thinking about highway access and carpet colors. Finding the perfect office can easily become a three-month process, during which you will be spending time with agents, bankers, and decorators instead of staff, vendors, and customers.
• Can you afford the move? Getting several thousand pounds of desks, computers, phone systems, and filing cabinets moved, even just a short distance, can be troublesome and costly. Getting everything set back up and operational can bring work to a halt for days. Budget $1,000 and one disrupted day for each 1,500 square feet.
• Can you afford the extras? Don’t compare rent to a mortgage payment. The mortgage holder pays a lot of things that the renter may not, including property taxes, common-area maintenance fees, and insurance. Even a small office can rack up extras of several hundred dollars more per month. A good real estate agent should be able to help you project these fees before you get into a sale contract.
• Can you afford the surprises? Often the most discouraging part of office ownership is keeping up with repairs and maintenance. When the air conditioning goes out in July, or a hail storm demolishes your roof, can you afford these instant expenses? If any two things happen in the same month, could your business recover from the hit?
• Can your personal credit handle the load? Unless you have an exceptionally large company, it is likely that your personal credit score will be considered for, and impacted by, any mortgage loan you take out for the company. If you are already stretching credit cards, or can see a looming need to borrow for your son’s college tuition, putting another big debt on your personal credit score may be a bad move.
• Can you afford the labor? Owning office space is an unpredictable venture. Tax consequences, irregular expenses, and general hassle fall squarely on you and your staff. These ongoing distractions can pull somebody away from work a few hours each week. Plan in advance for how this kind of work fits into your other activities.

Purposefully missing from this list are complicated formulas for calculating items such as capitalization rates and return on investment. If those things matter to you, consult a tax advisor, and then try a crystal ball. The tax advisor can make real estate work to its maximum advantage, and the crystal ball? That’s for predicting what the building will be worth when you are ready to sell it.

No one can say for sure how long you will use the building and what the market will be doing when you want to sell it, so rather than predicting the future, focus on the present. Will you be better off day to day, month to month by paying the various costs of ownership? Or does the simplicity of being a renter make more sense?