Commercial Premises: Renting vs. Buying

Business owners who are in the early stages who choose to rent should take out shorter tenancies until the business is more stable. It may also be possible to negotiate a rental price or ask the landlord to meet certain conditions before you sign such as redecorating or carrying out a deep clean. When buying a property, try to buy in areas which are ‘growth areas’ as this will often mean that more businesses will be arriving and the area will become more highly sought after. This means that in the future you may be able to sell at a profit. Make sure you look at several properties to ensure you get the best premises for your business, don’t settle for the first property you view.

If you are still in two minds over whether to rent or buy your business premises, take a look at the advantages and disadvantages of both.

Buying Commercial Premises

Advantages

• The property could increase in value which would directly reward your investment, and any improvements you make to the building are also to your benefit rather than a landlord’s.
• While mortgage payments can fluctuate, it is possible to get deals which are fixed for up to 10 years which is usually not the case when renting. Find out more about commercial mortgages.
• You won’t have to deal with unexpected rental increases or negotiating new leases.
• The interest you pay to your mortgage lender can be offset against your profits, so it’s tax deductible.
• If you want to make changes to the property, you can do so without having to ask permission (unless planning permission is required).
• Some commercial leases have periods of 10 years or more which can tie you to a property when you want to move on. When you own your property, you can sell it whenever you like.
• If you have a part of the building you are not using you can sub-let it to another business for extra income.

Disadvantages of Buying

• If you have a variable rate mortgage, your payments will vary with interest rates.
• To buy a property you’ll need to pay a large deposit of at least 20% of the property’s price. If you meet the lending terms and criteria, you may be able to apply for a bridging loan to secure a property without eating into your cash flow.
• You will need to pay other costs such as legal fees, valuation fees, and stamp duty.
• Property values can depreciate which may leave you in negative equity if you need to sell.

Renting Commercial Premises

Advantages

• You won’t need to pay a large deposit to get a tenancy as you would when taking out a mortgage so your cash flow won’t take as much of a hit.
• Moving into a rented property is often easier and quicker than applying for a mortgage so you can get up and running in a shorter time frame.
• Your rental payments will be fixed for the length of the tenancy and not subject to rising interest rates as mortgages are.
• If the property decreases in value, this will not affect your business.
• Unless is it otherwise stated in your contract, you will not be responsible for the cost or inconvenience of fixing plumbing, heating, etc.

Disadvantages

• If your lease specifies that you are responsible for repairing and maintaining certain aspects of the building, you will be improving the premises at your own expense, and the landlord will benefit.
• The landlord may choose to increase your rent at the end of a tenancy period with no notice which may mean you need to move on. Make sure you know from day one whether or not rent increases at the end of each period are possible so you can prepare.
• If the property’s value increases you won’t see any return and your rent is not investing in the future of your business but rather paying the landlord’s mortgage.