Should you rent or buy?

If you're having trouble deciding whether to rent or buy commercial property then this is the article for you

For occupiers, whether you choose to buy or rent your property will ultimately depend on your specific circumstances and needs, but it is worth considering the pros and cons of  each option before you make your decision. 

To rent

Renting out will have its benefits for start-up businesses. You will need less initial capital and if your company chooses to expand (or needs less space) in the future, you will not be tied into ownership and can relocate much more easily.

(Note that this will also depend on the length of your lease, but with so many flexible and short-term leases available, renting is perfect for a new business venture.)

Renting helps start-ups avoid a certain amount of risk. Property values and interest rates, which tend to change regularly, will not be a concern as you simply have to meet your monthly rental payments, without any stress of ownership.

There is generally the responsibility factor here. If the idea of a large upfront investment scares you, then do not deal with the responsibility of ownership. If you have no idea if you will be in the same location in several years' time, leasing may be the way to go.

A major downside to renting is that your landlord may choose to increase the rent unexpectedly, potentially putting you under huge financial pressure at any moment. Furthermore, if property prices rise, this will not equate to any profit or equity for your business.

Pros 

No deposit - your business doesn't have tie up a large sum of money 

The landlord is responsible for the maintenance of the property 

The fluctations in the property market won't affect you 

The business is easier to relocate if you need to expand 

The terms of the lease may be able to be negotiated

Cons

The landlord could increase the rent 

You don't own the property 

The business won't benefit from any increases in property prices 

To buy

Buying commercial property is a huge step for any business. In order to do this, it is likely that you'll need a commercial mortgage to finance your purchase. 

Buying is generally advised for companies that are more established. Not only will you have the financial backing to make such an initial investment, but it will be more likely that you are staying put for some time. With this also comes the security of there being no lease period, and therefore no risk of losing the space if one ran out, and fixed-rate commercial mortgages could stabilise any market price fluctuations.

Buying will also have its financial advantages. Not only could a property rise in value over time, guaranteeing a return on investment, but buying will also put you into a second business: real estate.

You can choose to rent out any additional office space, becoming a landlord, providing a secondary revenue stream.

Downsides to buying are financial: as well as the initial outlay (full price if buying outright, deposit if taking a mortgage), purchasing also means that any repair or maintenance costs will be your responsibility. It can also be restrictive to your ability to move on, which, depending on your financial state, may rest on your ability to sell.

As a general rule, if you are a young business with limited funds, use the flexibility of renting, but larger companies that have financial backing should consider investing in a long-term purchase. As always, consulting a financial planner or accountant for further information is advised.

Pros 

Some lenders will offer fixed-rate commercial mortgages that will offer you security for a set period of time 

You don't need to worry about your landlord increasing your rent 

The interest part of commercial mortgage repayments is tax-deductable

If the property increases in value your business' asset value also increases 

Depending on your mortgage lender, you may be able to sub-let your premisis to other busiesses and generate a rental income

Cons 

The initial cost is a lot - you will likely need to lay down a deposit of 20-30%

If you choose a variable rate mortgage, your payments could rise if interest rates go up

You will be responsible for the maintenance of the property 

it is harder to relocate the business if you own the property 

If your property decreases in value so does your business' asset value



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