Should you buy or rent your business premises?

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Date: 11 November 2022

A bunch of keys

The decision about whether you should buy or rent your business premises is a key one for budding business owners. Start up businesses can quickly outgrow a home office or co-working space and at that stage, an important decision must be made.

Choosing between buying a commercial property and renting isn't always simple. There are many factors to consider including the type of business premises you need, how quickly you expect to grow and your financial position. While people tend to clamour to own their own home, many business owners choose to rent indefinitely. While this can make sense for some, in many cases, buying can make a lot of sense.

The advantages of renting business premises

The advantages of renting your business premises are as follows:

  • Lower deposit The biggest advantage of renting a property is the initial cost. Deposits on commercial property are often very low, with some even offering an initial rent-free period.
  • Fixed term Your lease is set for a pre-determined term, and at the end, you're free to move on without having to remarket the property.
  • Greater choice of properties in some locations – In some places, especially busy city centres, there are very few commercial properties for sale. As such, choosing to rent in these places will afford you much greater choice.
  • You can be in quickly – The process of renting a commercial property is pretty straightforward. Depending on the type of lease, and when the property is available, you could theoretically move in within a few weeks.

Disadvantages of renting business premises

  • You're tied into a lease When renting, you're bound by a lease, so if you outgrow the space and want to move on, you'll still have to pay the rent unless you can come to an agreement with the landlord.
  • Restrictions on modifying the property – If you're looking to make a space your own, you may be restricted, depending on the terms of the lease. Even if you're allowed to make changes, you will be expected to return the property to the condition that you found it in at the end of your lease.
  • Inflation will increase costs – Many leases come with rent increases in line with inflation (which is currently around 10%). This will mean a significant increase in costs and a lease term that can't be broken.

The advantages of buying business premises

  • Property is a great investment – When you buy a commercial property, it is likely to increase in value over the longer term. You can increase the value further by making improvements to the property.
  • Potential for future income A commercial property can create passive income should you choose to let some or even all of the space in the future.
  • Increased flexibility When you own a property, you can choose to sell it at any time.
  • The option of fixing your costs Commercial mortgages can be taken on a fixed interest rate, removing the risk of your payments increasing during the fixed rate period.
  • Interest can be offset against tax The interest charged on your commercial mortgage or bridging loan can offset against tax.

The disadvantages of buying business premises

  • A large deposit is needed – Start-up businesses will usually need a deposit of 40% of the property value in order to secure finance.
  • The process takes time Commercial mortgages usually take around 6-8 weeks to complete. For urgent transactions, such as auction purchases, you could complete in around three weeks using a bridging loan , according to ABC Finance
  • Higher set-up costs – You'll need to factor in other costs when buying a commercial property including legal fees, stamp duty and valuation fees.

What are the key considerations before taking on a commercial property?

By considering these key points, the decision between renting and buying can be quite simple. The biggest consideration being how much money you're looking to put down now. When buying using a commercial mortgage or bridging loan, you're going to need a significant deposit.

In addition to this, the costs associated with bridging loans can eat into your investment.

Ask yourself the following questions:

  • How long do you want to remain in the property?
  • Is flexibility, or security more important to you?
  • How quickly would you like to be in the property?
  • Is offsetting interest important to you?

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