Is commercial property a good investment?
Should you buy or rent a commercial property?
If you are looking to move your business, there is an important decision to be made around whether you should buy or rent premises. There are several factors you should consider and making the right decision can be challenging. In this article, we look at the pros and cons of each to give you an idea of what you may wish to think about or discuss with your adviser.
The pros and cons of buying a commercial property
Potential investment opportunity
Firstly, like with any property purchase, buying a commercial property could be seen as an investment. The property may increase in value, and when you own your business premises, you can profit from this increase instead of your landlord. You can also offset the interest paid on the mortgage against your net profits.
However, you will need a large deposit to secure the property - often around 20-30% of the purchase price - which may not be viable for smaller businesses. It is unlikely, but possible, that the property could decrease in value too, which could mean that you owe your lender more than the property is worth. Investing in property is always a risk, so you should consider carefully before deciding to buy.
Planning your business's financial future
Another key benefit is that you can plan better for your costs. With a commercial property, you may be able to fix your mortgage payments for up to ten years. However, when you rent, you may be subject to rent increases making it harder to create business projections. It can also make doing business more difficult where you are operating on tight margins. A large rent increase could even make your operation no longer viable.
On the other hand, if you have a variable rate mortgage on the property, payments can rise by a significant amount, so this may not be as much of an advantage as you might think.
Option to sell
Although you can fix your mortgage payments for a long period, you may find that your business premises need to change or are no longer fit for purpose. If you own your commercial premises, you can sell whenever you want. However, if you are renting, you may be tied into a lease that can be tricky. Some commercial premises have lease terms of up to 15 years, which may not work for your business.
Making necessary changes to the premises
When you own your business premises, it allows you to make any changes to the property that you see fit. Making such changes can be crucial to business operations, and this freedom should be a key consideration when you are thinking about buying or renting a commercial property. You can also sub-let all or part of the building, which is often not possible when you are renting.
You may, of course, be able to make changes if you rent a property, but this will be subject to obtaining the landlord's permission.
The pros and cons of renting a commercial property
For most, the biggest disadvantage of a rented property is that paying rent will never offer a return. You won't benefit from any increase in the property's value, and it can feel like money wasted. However, there are many benefits to renting too.
Faster and more straightforward
Typically, the process of getting into a rented commercial property is much quicker and more straightforward. You can cut out the process of securing a mortgage and conveyancing, allowing you to relocate quickly.
No large deposit required
Similarly, you won't need to save up a large deposit to rent a property, making getting new premises easier for smaller businesses. If your business has good cash flow, you could end up renting a great space you could never afford to buy, boosting the image of your business.
Subject to lease conditions
There are of course disadvantages to renting, mainly that you will be subject to the conditions of your landlord. You may need to pay for repairs where you are on a 'full repairing' lease, and any changes you make could add value to your landlord's property at the expense of your business.
Speak to an advisor
Whether you choose to buy or rent a commercial property will depend on your specific needs and circumstances. You should seek advice from an experienced commercial property solicitor who can explain your options to you.