Whether to buy or rent your commercial premises is likely to be one of the biggest decisions you will make in business. Whether you need a warehouse, office or factory, your premises are likely to be your biggest outgoing. So, it is vital for the success of your company that you make the right decision about renting or buying.
If you are likely to need to move premises in the near future, then leasing the commercial property may be a good idea in the short term, as buying can involve many costs that you won’t want to incur on a regular basis. But buying the property is probably the best option if you would prefer to fix the costs of your buildings and buying is also an investment, with potentially high gains in value over time. Before making your final decision however, ensure that you’ve clearly thought it all through.
When To Rent: As a new business you’ll probably not have the funding available for a commercial mortgage, as deposit payments of between 25 to 50 percent can be required. It’s a totally different ball game to residential property mortgages because it’s riskier for the lender. Although it’s a long term investment, you need a big sum up front in the first place, which isn’t easy for a business that is very young and still building their assets.
If you rent a property you will often find that your property costs are out of your hands. Your landlord can increase the rent on a regular basis making it difficult for you to manage your cash flow. Buying commercial premises allows you to keep a much tighter control over your expenses as you know exactly what your monthly payments will be. And, your interest payments on a commercial mortgage are a valid business expense for tax purposes.
By renting, you can be far more adaptable as a business too – so for instance if you suddenly boom overnight and need to get a bigger office or factory, you can do so much quicker and easier than if you had a mortgage. Selling old premises and buying new ones is a lengthy process and means that you are far more ‘tied in’ than if you are simply renting when you can usually give 2-4 weeks notice and get on with the move.
One of the main disadvantages to buying rather than renting commercial property is that you will have to commit a sizeable chunk of your business capital to the purchase. Most commercial mortgages are agreed at between 50-75 per cent of the property value, meaning that you will have to put down the remainder as a deposit. In addition, buying commercial property makes it much more difficult for your business to relocate in future. It is easier to break a rental agreement to move to new premises than it is to sell up.
Mortgage payments made for commercial property by a business are also allowed as an expense for tax purposes so you can actually get some money back and/or pay less tax, which of course is always a plus. For company directors, you can often also buy a property through certain pension plans, although it would be best to speak to a financial adviser before making such a decision as the process can be complicated and carries certain risks.
An advantage of owning your own business premises is that you can let out unused parts of the building to other businesses and charge rent, which can then be put towards your mortgage payments to reduce your costs.
The only downside is that commercial mortgages often require a large deposit, but if the capital is there that won’t be a problem. Depending on your company’s situation and the building being purchased, the deposit can be up to 50% of the property value. You’ll also need to be quite sure that you will be happy where you are as the costs of relocating will be very high compared with those of moving from one rented property to another.
Verdict: Only by analysing the specific needs of your business will you be able to determine whether renting or buying is right for you. So, it is crucial that you take all the above factors into account before applying for a commercial mortgage to buy property or signing a long term rental agreement.
Howard writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.
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