19 August 2019/ rent_commercial_property_guide

Is it better to lease or buy commercial property?

Ask yourself these questions to weigh up the pros and cons of each option

See commercial property for rent in your area on Realla

You've found the ideal location for your new office space, but now what? Do you rent the space or buy it? Both decisions will entail a substantial financial commitment, but which is the right choice for your business?

Here are some helpful questions to ask when deciding whether to rent or buy office space:

  • How long do you envisage this office space will work for your company?
  • Are you anticipating significant growth in the coming years?
  • How much cash do you have to hand?
  • What’s the local commercial property market like – are properties going up or down in value?

Once you've answered the above questions, you'll be better equipped to examine the pros and cons of the rent or buy options.

Leasing may be better if...

 

The space isn't the perfect fit. If you're not 100% convinced that the commercial property you've found is perfect – either for now, or in the long-term – you may be better off renting. This option will be best if the current space is a good fit for now but doesn't offer expansion opportunities to meet your growing business' needs in the future. If you’re renting, you just have to see out your lease and move to bigger premises. For owners, it means selling up or finding a tenant and taking out another mortgage elsewhere.

You don't have a lot of cash to hand. Many small business owners reinvest every penny of profit back into the business, and don't have extra cash lying around. Renting will give you greater control over your cash flow as rents tend to be fixed, whereas mortgage payments will be affected by interest rate rises. Owners also have to pay for extra buildings insurance. To buy premises, you’ll need to sink some capital into the building, and probably take out a commercial mortgage as well. This may affect the profitability of your business in the short-term and restrict your ability to find or borrow capital for new projects. When you rent, you don't have to find the cash for a deposit, which can be 20% to 30% of the purchase price. Instead, you'll need a smaller amount of cash to pay a deposit and a broker's fee for the lease.

You don't want the headache of building repairs. Most commercial leases are worded so that the landlord is responsible for maintenance expenses, repairs, and necessary building improvements. So, when the roof needs replacing, that won't be your financial responsibility as a tenant.

Buying may be the better option if…

 

You want to build equity. When you purchase a commercial building, you’ll begin to build equity – essentially, you’re investing in a long-term asset for your business. With renting, you’re investing in someone else’s long-term asset. You can then take a loan against the equity to expand your business, fund your retirement, or for other purposes. Plus, with interest rates at historic lows, this may be a good time to purchase. However, always bear in mind that the value of property investments can go down as well as up.

You want flexibility. Another benefit of owning rather than leasing office space is that can do virtually whatever you like within your own building, such as creating extra space. This may remove the need to move in the future. This is an option that may not be open to tenants. Lease agreements often state the premises must be put back to the original state when they are vacated, which could mean thousands of pounds of improvement work you have done has to be ripped out.

You want to increase cash flow by renting out extra space. Many small business owners purchase a building that offers them space to expand their business in the future. In the meantime, they rent out the extra space to increase cash flow and offset costs.

Whatever option you choose, make sure get the best deal…

 

If you decide to rent, opt for a short-term lease as you never know what’s around the corner. It may cost you a little more, but there could come a day when you’ll appreciate the ability to move quickly. Don’t accept the first rental figure without haggling and check how rent is reviewed to avoid unpleasant surprises after you’ve moved in.

If you’re sold on buying, take your time to look around and never buy the first property you see. Look for premises in growth areas where government initiatives could be in place to regenerate locations and attract new employers to boost the local economy. Consider how a property’s size, location and proximity to amenities will affect your business and your staff.

Depending on your business' needs and growth plans, either renting or purchasing commercial office space can be a smart decision for your company.

Looking for commercial property to let? Check out Realla and find your next commercial property for rent!