Buying commercial premises: pros and cons compared to leaseholds

Like buying your own home, acquiring the freehold on a commercial property has many compelling advantages. But it’s not for everyone, as the drawbacks illustrate.

Moving into your own commercial property is an exciting prospect for any growing business venture.

However, it can also be a difficult process.

There are various stages to acquiring commercial premises for your business: from locating the perfect site and securing the premises to getting a commercial mortgage.

But first, you will need to consider whether buying truly is the right option for you and your business.

As a general rule, the overall costs of buying property are higher than the equivalent rental costs for the first five years. It is then broadly equal over the next five and generally cheaper in the years after. Therefore buying should be seen as a long-term investment.

So you should take your time and weigh up the advantages and disadvantages before committing.

Pros

You no longer have to worry about rental increases

Interest payments on commercial mortgages are tax-deductible

Your mortgage repayments are likely to be the same or less than rental costs (when compared to a similar property)

There may be the opportunity to fix monthly payments, giving you more stability

If the lender agrees, you can sublet to other tenants to reduce your mortgage repayments

If needed, you can remortgage the property to raise finance

If the property increases in value then your business will benefit from capital gain

You gain more flexibility – to renovate, refurnish and extend as you please because you are the owner

Cons

A deposit of between 20-30% of the value of the property will be needed in advance

You will need sufficient cash flow to finance ongoing maintenance and upkeep of the property

If the property happens to decrease in value, it will have a negative impact on your business capital

If your circumstances change you will have less flexibility to relocate – i.e. selling a property takes longer, generally, than exiting a lease agreement

There is no guarantee that your mortgage repayments will not increase – depending on interest rates

Buying instead of renting ties up cash flow that could be invested in staff, marketing and other drivers of revenue growth

Your purchase will depend on an inherently unpredictable market, so there is always some level of risk involved

What type of premises are you looking for?

The kind of premises you buy will ultimately depend on the kind of business that you run and your specific criteria. So it is worth considering questions like:

How much space do you need per employee?

Do you need additional space for interviews/meetings/conferences?

Do you need parking for staff, visitors or customers?

How much storage space do you need?

Do you need to obtain permissions to conduct your kind of business (i.e. is it the correct use class for your sector)?

Location

Again, this will depend on the needs of your business. A prime location– one with high footfall or convenient transport links – is more important for some businesses than others.

Businesses like cafes or coffee shops may rely heavily on high footfall and passing trade, whereas online or tech companies might decide such a location is not worth the premium. So you need to consider whether a high level of visibility is an absolute must.

It is often beneficial for retailers to be surrounded by other retail outlets, as people are more likely to travel to a destination where they can browse several shops rather than just one. However, if the area is oversaturated this can also be a problem – it’s all about finding the right balance.

A distribution or logistics business, on the other hand, would more likely prioritise proximity to motorways. Media companies tend to flock to London, despite high prices, because the capital has a preponderance of workers with the relevant skills.

If your premises don’t need to be in a central or high-street location, however, could you consider a more remote location to secure a better deal?

Finance

In most cases, business owners need a commercial mortgage to finance their acquisition (unless they are lucky enough to have a lot of spare cash lying around).

Large deposits are generally required – usually between 20-30% of the building’s price.

You will need to commit to a minimum term of 15 years and provide your cash flow projections and accounts to the lender. 

A significant amount of capital is generally required, so set aside a budget for any additional or unexpected costs around decorating, repairs and buying new furniture and equipment.

Professional advice

If you are not a cash buyer you will need to have a survey carried out as a part of your mortgage application process.

It is at this point that the surveyor can advise you on the investment value of the premises, assess their condition and negotiate a price for you.

It is always recommended that you seek legal and financial advice from a qualified professional when buying commercial property.



Melanie Luff

About the author

Mel wrote for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other global industry publications.

@Be_TheBoss

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