When looking for a commercial property, there is a key decision to be made around whether you should buy the property or rent it. There are several factors to consider and making that decision can feel quite tricky.
Today, we will be breaking down the advantages and disadvantages of each approach.
Purchasing a commercial property
As with many things in life, there are pros and cons to every decision we make. Buying a commercial property can be a very advantageous approach for a business, although it may be the more suitable approach for those who are more established.
When looking to make a purchase for a very new business, lenders may be more cautious when lending money. This could lead to a larger deposit being required and most likely a higher interest rate being charged too.
Where this is the case, it may make renting a more economical choice in comparison.
See below the advantages and advantages when choosing to purchase a commercial property:
- The property that you purchase will increase in value, much like your home. So, when you own the building that you trade from, this means that you will benefit from any increases in value, rather than your landlord.
- You can fix your mortgage payments for up to 10 years, something that is typically not possible when renting a commercial property.
- Rent increases and lease negotiations are a thing of the past when you are a property owner. Unexpected or large rent increases can be difficult to manage when things are tight. With a fixed mortgage you know what your monthly outgoings will be, making your finances that little bit more manageable.
- You can offset the interest paid to a lender against your net profits, making it completely tax deductible.
- You can make changes to the property as you see fit, without having to ask for your landlord’s permission.
- You are not tied to the property for an arbitrary period. Prime commercial spaces often come with long leases of 15 years or more. It can be hard to predict how your business will perform over this period. When you own a property, you can choose to sell, whereas it can be very tricky to exit a lease before the end of the term.
- Where needed you can sub-let part of your building without an issue, this is not possible when renting.
- Variable rate mortgages can increase by a significant amount, meaning that your payments can also rise.
- You will need to pay a large deposit to secure the property – often in the region of 25-30% of the purchase price.
- You will encounter other costs when buying a commercial property such as stamp duty, legal fees, and valuation fees.
- Property prices can go down as well as up, if your property goes down in value, you could end up owing more than the property value.
Renting a commercial property
Renting a property comes with its own advantages and disadvantages but can be a simpler transaction in many cases.
Although a lease is a liability, the lower set up costs can make renting worthwhile, especially for smaller businesses.
For companies that have recently started, it may be harder to predict cash flow, so by having more flexible leases could be the right choice for that business. Especially if they leave the responsibility for repairs and renewals at the door of the landlord, as this takes away the risk of a large, unexpected bill for repairs.
Keep reading to see the pros and cons of renting a commercial property:
- The process of moving into a rented property is much quicker and easier than mortgaging a commercial property, meaning that you can relocate quicker.
- You will not have to fix up a large deposit to secure the property.
- A decrease in property value will not affect you.
- You may still be liable to pay for repairs if your lease is fully repairing, adding value to the landlord’s property at your expense.
- Rents can increase sharply without warning, although you can move on, it is still costly and inconvenient.
- You will not benefit from increases in the property value and your rent will never offer you a return.
We’re here to help
The right route for you depends on your own individual circumstances. Each business is different and has its own complex needs.
Before making that decision, talk to one of our commercial property experts on 01332 292825, who will be able to give you good advice for your next business steps.