To rent, or to buy? Hardly Shakespeare, but when it comes to your business, the decision whether to rent or buy commercial premises is not one to be taken lightly. Whatever you eventually decide, moving into new premises is a major commitment. As a tenant who is renting the property, you’re likely to be looking at a minimum lease of 5 years, possibly with a break out clause that would allow you to terminate the contract at the 3 year mark.
As a commercial property owner, you’re likely to have committed a portion of your operating costs to paying off a mortgage which could last as much as 25 years.
So, which is the right decision? Naturally, every business owner approaches this decision with a very different set of criteria, but what they all have in common is that they do not have a crystal ball. Projections for the future of the business need to be based on hard facts and statistical analysis – not optimism and guess work.
Here at Prideview, we understand the numerous concerns that business owners have when it comes to investing in commercial property, whether that’s as a tenant or an owner. We’ve seen them agonising over the decision before they came to us, only to discover that, by asking the right questions, the choice whether to rent or buy their commercial property could have been made a lot easier.
In this article, we’ll take a look at the benefits and pitfalls of either buying or renting commercial premises. We’ll take a look at what to expect when looking at either, and we hope to make your decision easier.
Naturally, this article is meant merely as an overview, and not a comprehensive guide to either buying or renting commercial property. With such a major investment, it’s important to seek advice from a qualified and reputable team with a track record in helping businesses find the right premises for them, and that team is Prideview.
Where to Start
Before you begin weighing up the two, it’s important to take into consideration some of these factors:
First, how much can you afford to commit financially at the outset of this venture? A tenancy agreement may only require one to three months’ rent in order to take possession of the property, whereas buying is likely to mean a mortgage, and banks are unlikely to lend more than 90% of the value of the property, hence a sizable deposit will be required.
Second is maintenance, and this is an interesting area to consider. As an owner, you are responsible for the upkeep of your property. Keeping in line with health and safety legislation, as well as simple maintenance like decorating all fall under your responsibility.
Now in a residential market, tenants are not responsible for the maintenance of their home – it falls to the landlord, but this is not the case when it comes to commercial property. The responsibility falls to you once again. Whilst any major repairs will usually be covered by the landlord’s buildings insurance, all minor repairs and general upkeep will fall to the tenant.
The third consideration is location. You need to consider just how long you intend to remain in the same area. Once again, as a tenant you are looking at a minimum least of 5 years, and indeed many commercial property owners prefer to start at the 10 year mark with a breakout clause at 5 years.
As an owner, you can put the property back onto the market whenever you so require, so does the location and the size of the building meet the needs of your business for that time period?
If there’s a possibility that your business could scale at a much faster rate than anticipated, then committing to a fixed period of time may not be in your best interests. Naturally, you’ve no way of knowing that this is going to happen, but it is important to keep such possibilities in mind.
So with positives and negatives in both camps, let’s take a look at the advantages of buying a commercial property for your business premises.
Advantages of owning the premises
Of course, buying a property is a major financial commitment, and few, if any business owners enter into such a decision lightly. Start up operations rarely find themselves with this quandary. In their initial stages, they need to focus all of their operating capital on keeping the business running, and will therefore only really have considered renting – either in a space of their own or within serviced offices where a lot of the important amenities are taken care of by the owners of the office building.
But for many businesses, it’s time to take things to the next step with new premises that are better suited to the current demands of their business. When it’s time to buy, there is clearly going to be a very long checklist of things to consider, and we’ve touched upon many of these in our other articles. So what are the advantages of buying over renting?
First and most obvious is that you will be adding another major asset to the company’s inventory – the building itself. Well maintained, commercial property has an appreciation rate of around 3% per annum. Of course many business and property owners have seen substantially greater returns, but you are looking for premises in which to operate your business, not simply a commercial property investment with which to build a portfolio.
As someone repaying a mortgage, your monthly mortgage payment is likely to be lower than the rents that a landlord would charge for the same property. Moreover, removing a landlord from the equation means that you won’t have to worry about any annual rent reviews. A fixed term commercial mortgage can be taken out with a discounted introductory rate over a 3 year period, thus giving your finances a little bit of extra breathing room.
Your accountants would no doubt want to advise you that, depending upon how your mortgage is structured, that the interest payments on that loan are a tax deductible expense.
And of course, let’s not forget that the building is yours to do with as you wish. You may well have purchased the building with a view to expanding your business within a given time frame, but it might be too soon after taking possession to start that expansion programme.
What this means is that you can become landlords for some of the space within your building, possibly even an entire floor, and the rental income from that space would not only cover the mortgage, but the profits from it could be the very thing which finances the next stage in your company’s expansion.
Advantages of renting the premises
Of course, it’s important that we present a balanced argument here. Buying does offer a lot of advantages over renting a commercial property, but there are some disadvantages too, so let’s consider the advantages of renting your commercial premises instead of buying.
As mentioned before, purchasing a property requires a mortgage, and banks are likely to require their borrowers to provide a deposit to at least 10% of the property value. That figure could be the equivalent of the annual salary of more than one member of staff – it’s a major portion of the company’s operating capital and it cannot be paid in instalments, unlike rent.
Saving that money can mean that your business is able to operate at a higher profit margin and perhaps weather the storm in times of economic uncertainty.
Should it be time to relocate, be it for expansion, downsizing or just because the business would benefit from being in another part of the country, it can prove a lot easier to simply give notice to the landlord and agree upon an exit date.
Selling a property takes time, no matter how desirable it is, plus whilst you’re working on marketing the property to potential buyers, you’re not working on your actual business.
We mentioned above that, as tenants, you will be responsible for maintenance of the property. Whilst this is usually the case, there are some landlord/tenant agreement in place where some of that responsibility falls to the landlord. In the event of a major incident, the property will be covered by the landlord’s buildings insurance. That is not to say that, as a tenant, you should not take out adequate insurance cover as well, but this would be for contents, and not the structure.
That same policy would also cover you in the event that the building becomes uninhabitable. Your operations will need to be housed and any losses incurred as a result of your temporary accommodations should be covered by the landlord and their insurance policy.
This freedom from extensive property maintenance bills leaves you with more capital to invest in your business, all with a view to seeing it thrive.
So is it better to rent or to buy? Clearly there are advantages and disadvantages in both, and we fully accept that it is a major decision. That’s why it’s important that you don’t rush it and that you speak with advisors who truly understand your business goals.
So when you’re looking for that advice, or if indeed you’ve already made your decision, we at Prideview are happy to help! For more information, our friendly and professional team can be contacted here.