Like many therapists, my wife, Risa, started as an associate in someone else’s group practice. That meant she didn’t need to rent space.
She eventually started her own practice. When you do that and don’t have any clients yet, even subletting an office one day a week for $150 can seem overwhelming. At that point, buying space would be the height of foolishness.
Over time, she built up to two days a week, then three, then four. When she was ready for a full-time office, there wasn’t one available in that suite. It was time to graduate to the next level.
Pros and Cons of Renting Your Own Space
When Risa started leasing her own suite, she got the landlord’s approval to sublease the extra offices to others. Fortunately, sublessees would help her afford the full-suite rent, which was much higher than subletting a single office. Less-than-fortunately, however, she had to scramble to find sublessees to fill those offices. Worse, some of her sublessees weren’t what you’d call ideal tenants. It took time to learn how to recognize the signs of a problematic renter.
On top of that, the landlord charged "overages" to her and other suite renters anytime his annual expenses went above a set amount. This was often more than an extra month’s rent. He’d also increase the rent each year, even if there wasn’t the inflation to justify it.
The pros of renting her own suite were:
- She had space to see clients anytime she wanted.
- When she was able to sublease several offices, her rent cost was lower than subletting an office in someone else’s suite.
The cons were:
- The rent for a suite was much higher than subletting an office, which was a problem when she couldn’t find enough sublessees.
- The overages were unpredictable and often quite high.
- Rent would increase each year of the lease and even more when renewing the lease.
- Money paid as rent or overages was pure expense, just like when you rent a home.
- There was no deduction for depreciation.
Buying an Office Space: How Do You Know It’s Time?
After several years, we put our heads together and finally decided that it made more sense to buy an office suite rather than lease someone else’s. We considered four main things:
- Would we likely want to continue holding the suite for at least the 15 years of the business mortgage (a.k.a. time horizon)?
- Could we come up with an acceptable business mortgage and down payment?
- Were we confident that our cash flow would cover the monthly payments?
- Would our costs be lower or higher than continuing to rent from someone else?
Here’s how we broke these down.
1. Time horizon
At that time, Risa expected to stay in practice for at least another 15–20 years, so a 15-year fixed-rate business mortgage was acceptable.
2. Mortgage and down payment
This was the tough one. Our bank at the time declined to offer us a business mortgage, claiming we had too short a history with high-enough revenue. Luckily, the seller of the office suite connected us with a small bank with more flexible criteria. We also had enough set aside for the required down payment.
The seller also offered enough buildout assistance that we could afford to build out the suite. Otherwise, we wouldn’t have been able to make this work.
3. Ongoing cash flow
We broke down our expected costs for owning the suite:
- Mortgage payments
- Condo association fees
- Utility bills
- Maintenance and repairs (including cleaning service)
- Insurance for contents and general liability
- Property taxes and business personal property taxes (yeah, that’s a thing in Maryland)
- Homeowner Association (HOA) fees (these can apply to commercial properties, too, in some jurisdictions)
- Operating supplies (e.g., coffee, tea, water, candy, etc. for clients in waiting room)
However, Risa’s practice already had some of these expenses, including rent and overages, utility bills, maintenance, insurance, and operating supplies.
Thus, we only had to make sure we could cover the new excess:
- The difference between the mortgage vs. rent plus overages
- Condo association fees
- Repairs
- Property taxes and business personal property taxes
- HOA fees
When we determined we could cover these extra payments after accounting for the new tax deductions for depreciation and interest, it was third down, and one last to go!
4. Cost comparison
This fourth and last consideration was to see if it made financial sense, reducing our ongoing costs. Here, we needed to differentiate between cash flow and costs. For example, while we’d have to cover each mortgage payment in its entirety, only the interest would be a true cost. The principal portion would be a self-imposed investment in real estate.
Additionally, the deduction for depreciation didn’t require that we spend anything each month or year to reduce our tax payments.
Crunching all the numbers, it was clear that our costs would indeed be lower if we bought an office suite rather than continuing to rent.
Pros and Cons of Buying Office Space
Deciding to buy your own office space isn’t easy. There are pros and cons to consider, and the inherent uncertainties about the future could cause you significant stress.
The pros of buying:
- You get to deduct depreciation of the value of the office space, reducing your taxes.
- Assuming you get a fixed-rate mortgage, your payments will stay the same (adjusting for inflation, they’ll actually go down in terms of purchasing power). This is far better than renting, where your costs aren’t under your control and will usually increase each year.
- Once the mortgage is paid off, both your cash flow and costs will improve dramatically.
- When you decide to retire, you can sell the property and invest the proceeds to bolster your retirement portfolio, or you can rent out the space to others and use the income to help fund your retirement.
The cons of buying:
- You have to come up with a large chunk of change to pay for the down payment and any needed buildout, which ties up a significant amount of capital in a non-liquid asset.
- You give up the flexibility of being able to simply move to a different space at the end of a lease.
- Until the mortgage is paid off, your cash flow will be affected significantly (by the principal portion of your mortgage payments).
- If something happens and you can’t make your mortgage payments, you will be forced to sell, potentially at a loss. If you can’t sell, the bank will foreclose, and you’ll lose a significant part of your equity.
The Bottom Line
In the long run, buying your own space is likely a better financial deal than leasing. The reason is straightforward: If you lease, you’re covering your landlord’s costs of ownership plus profit. When you buy, you still need to cover the costs of ownership but don’t need to pay for someone else’s profit.
However, you tie up a lot of money, give up flexibility, and take on risk that things may not work out as planned. If you want to know if it’s time for you to consider buying, see if you can answer “yes” to each of these questions:
- Am I planning to stay and operate the practice for at least the length of the mortgage?
- Can I get a mortgage covering the purchase and any needed buildout at acceptable terms (down payment, interest, monthly payment)?
- Can I cover the increase in cash-flow payments?
- Will my cost be lower than renting (net of the principal portion of the mortgage payments and the tax reduction due to deducting mortgage interest and depreciation)?
Note that even if you answer “yes” to all four questions, you have to be willing to accept the cons mentioned above, some of which aren’t strictly monetary.
Additionally, you may decide that if you buy a space, you want it to be nicer and in a better location than space you’d be willing to rent. The result will be that purchasing may become less compelling because you’ll need more money at closing and more money each month until you pay off the mortgage.
