Renting or buying a commercial property – which is best?
6 Dec, 2018
It can really make good sense to rent a commercial property, particularly in the early stages of your business when you may well be able to afford to rent (rather than buy) a building in a prime location with a good physical presence and footfall which is considered essential if you are in the restaurant or retail business. Having said that, there are several good plus factors to owning a commercial property....time for deliberation!
Less financial investment for renters.
If you decide to rent a commercial property, less of your capital will be tied up in the property – which is useful as it can be used in other areas of your business. The upfront costs are definitely much lower although you likely have to pay a refundable deposit equivalent to 3-6 months rent.
A problem could occur when your lease expires – you could be faced with higher costs.
Your rent will probably be increased at regular intervals (usually every three years) and this could affect your running costs, but having said that, you will not be impacted if there is a change in the interest rate or if the value of the property drops.
You will be required to maintain the interior of the building and to complete repairs and maintenance to keep things in good order. The exterior of the building is usually the responsibility of the landlord.
A major plus factor is that if you find that the building is no longer suitable to your needs as your business grows, you will not stuck with a property that you must sell. To cover such eventualities, it is possible to have a 'break clause' written into the rental lease which will mean that you can end the lease and move to an alternative property far more quickly.
The costs involved in renting a commercial property.
If you are considering going down the rental route, there are additional expenses you incur:-
- Refundable deposit
- Rental costs
- Service charges
- All utility bills
- Repair & maintenance bills
- Stamp duty
- Business rates
And on the flip side of the coin - the advantages of buying....
A good investment.
True, you will have to pay much more working capital up front, but for the money you invest in a commercial building, you will get a better return than if you had bought a residential property – 6-12% a year at present. If you own the building, the growth in your
investment can be viewed as saving for the future as you may be able to sell the property at a profit. If you do decide to buy a commercial property you will also be eligible for tax deductions on mortgage interest and property tax.
An added bonus is that if you buy a building that is actually too large for your current requirements, there is the potential to rent out space which will bring in extra money.
The decision whether to rent or to buy is far from clear cut for most small business owners, so to help you make the right decision for you, it is worth discussing things through with your accountant or financial adviser....