Figuring out whether to buy or lease a property for your business can be complicated. Making the smartest decision can come down to what’s available on the market in your area of choice. There are some important questions to ask yourself. Do you need the flexibility of a lease or the security of a mortgage? Can you afford to buy, or do you need to keep the extra capital available? How old is your business and what is your growth projection for the next five to ten years?
First, you need to find the right space for your business. How does this space look in your mind’s eye? How should the space function around your operations? Are you downsizing or upscaling? Does your business need a shop front? If you have employees what needs do they have i.e. parking, disability access, communal spaces, work stations etc. What sort of capital do you have to spend? Is your capital best spent on a lease and internal refurbishment to suit your business rather than the huge outlay in purchasing a commercial property?
What is the commercial property market like in your area? Is it affordable? Is it likely to grow in value, remain static, or worse decline?
The pros of owning
If you own the premises you can re develop, you can change, and manage the site as best as you see fit. You own all the fixtures and fittings and upgrades to property assets, and you are not paying off someone else’s mortgage.
Often the commercial property is purpose built in the manufacturing sector and it can be hard to find the right building to lease for your line of work. Refurbishing can cost more than you are willing to spend, particularly if you are not sure how long you will be leasing the premises. If you buy the building, all capital improvement and refurbishing is improving the value of your asset that you can later sell, therefore it’s an appreciating investment. A mortgage builds equity and over time that equity can be used to leverage more finance and business investment.
If you don’t fill the whole premises with your business, you can sublease part of the building to other businesses and it becomes another income stream. This would help in recovering part of your mortgage repayments. And there are tax advantages and cost offsets available such as depreciation on fittings and fixtures on commercial property. If you sell the business but retain the freehold premises you may be able to use the rental income to fund your retirement.
Up front security deposits on leases and ongoing rent increases in line with CPI can be expensive. You avoid being locked into a long-term lease with rental payments and don’t have to negotiate lease renewals and rental costs annually if you own the building. There is less disruption to your business as you are not at the whim of a landlord who may decide to sell or not to renew your lease next year.
The cons of owning
Renting allows you to be more flexible when it comes to downsizing if business takes a slide or upsizing if you out grow the premises. Finding commercial buildings for sale is most likely a lot harder than locating a lease property.
Banks and lending institutions demand a higher deposit for commercial mortgages and, depending on their location, these properties are expensive. A lender will want some form of security such as the family home. It’s also possible that your property may decline in value and when it comes to sell you may lose money.
Buying property means that your capital is tied up for a long time in the mortgage and not available for spending on business opportunities and generating returns.
Being locked in to a mortgage means if you outgrow your premises you can’t expand until you sell the property which can take more time than you would like. Your equity is tied up in the building preventing the flexibility to respond to developments in your business with liquid capital.
Council rates, land tax, ongoing maintenance and repairs on the building and high insurance costs can be a liability to your bottom line. As the landlord you are responsible to set up and fit out the building and this can be costly.
If you are a start-up, renting is the better option. As you observe the growth patterns of your business over the first five to ten-year period you can then use projections to base your decision on whether to lease or buy in the future.
If you lease a property you can deduct the entire amount of lease paid plus utility expenses off your tax liability.
If you are planning to buy a commercial property its important to visit the local council and find out the permits and approvals you will need to fit out or improve the premises for your business. You often will need a building or planning permit.
If you are a business owner looking to rent or purchase a property, you need legal advice before committing to a lease or a mortgage. Robertson Hyetts Solicitors are specialists in business and commercial law. Our conveyancing service will take care of the fine details of your property purchase if you decide that’s the best way forward for your company, small business or consultancy. Our business law team can look after you if you decide that leasing is the best option for you.
Why not give us a call and let us do the hard work for you?