When looking to move your business, there is a key decision to be made around whether you should buy your next building, or rent. There are a number of factors to consider and making the right decision can be tricky.
In this guide, we will break down the key advantages and disadvantages of each approach.
Buying a commercial property
As with most things in life, there are pros and cons to each approach. Buying a commercial property can be very advantageous for businesses, although it may be more suited to those that have been established for at least a few years.
When looking to buy for a very new business, lenders may be more cautious about lending you money. This will lead to a larger deposit being required and most likely a higher interest rate being charged.
Where this is the case, it may make renting an economical option in comparison.
Below we break down the main pros and cons when choosing to buy a property.
- The property that you purchase could well increase in value, much like your own home. When you own the building that you trade from, this means that you benefit from any increases in value, rather than your landlord.
- You can fix your mortgage payments for up to 10 years, something that is not usually possible when renting.
- Rent increases and lease negotiations are a thing of the past. Unexpected or large rent increases can be difficult to manage when things are tight.
- 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 aren’t tied to the property for an arbitrary period of time. Prime commercial spaces often come with long leases of 15 years or more. It can be hard to predict how your businesses will fare 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 issue, this is not possible when renting.
- Variable rate mortgages can increase by a significant amount, meaning 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 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 can be a simpler transaction in many cases.
Although a lease is a liability, whereas a property is an asset, the lower set up costs can make this worthwhile, especially for smaller companies.
For companies that have recently started, it may be harder to predict cash flow, so shorter, more flexible leases may be a good option. 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.
Read on for a breakdown of the pros and cons of renting a commercial property.
- The process of moving into a rented property is quicker and easier than mortgaging a commercial property, meaning you can relocate quicker.
- You won’t have to tie up a large deposit to secure the property.
- A decrease in property values will not affect you.
- You may still be liable to pay for repairs if your lease is fully repairing, adding value to the landlords property at your expense.
- Rents can increase sharply with little warning, although you can move on, it is still costly and inconvenient.
- You won’t 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 has its own complex needs.
Before making a decision, talk to one of our commercial mortgage experts on 01922 620008, who will be able to give you a detailed breakdown of your likely costs. This will allow you to accurately compare the costs of each route and how large a deposit would be needed to complete a purchase.
Alternatively, read our commercial mortgage case studies.