Ownership Vs Renting: Should A Business Invest In Their Own Property?

Posted by Emma Robison on Sep 18, 2019 12:56:00 PM
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Ownership Vs Renting: Should A Business Invest In Their Own Property?

Deciding whether to buy or rent is an important decision when it comes to investing in your business. There are pros and cons to both and what is most suitable depends on a number of factors, such as your budget, the importance of location for your business and the stage of growth of your business. In this article, we set out the main advantages and disadvantages to help you make a well-considered choice.

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Purchasing Your Business Property

Advantages:

1) Once you have paid the purchase price and any applicable stamp duty, the property is yours to do with as you please. The decision to make material changes to the property is yours and if you have purchased the freehold, you won’t be subject to any service charge or rental payments.

2) Property prices fluctuate, but if your commercial property does go up in value over time, you could make a return on your initial investment if you decide to sell. A commercial property is a powerful asset you can borrow against as required to release capital for growth plans and increase liquidity.

3) The overall cost of purchasing a property can be less expensive than leasing in the long term and you have an asset at the end of it.

4) If you borrow to pay for the property, you can fix the repayments for up to ten years, so your monthly outlay is more certain. This contrasts to rental property where the landlord can increase the rent at the end of each lease period or at rent review dates.

5) If you own the freehold of a large property, such as a block of flats or office space, you may be able to make additional income by renting out surplus space to tenants.

6) Most commercial rental agreements bind you into fixed term leases of 3-5 years, which may or may not then be renewed. There are no such restrictions or uncertainties when you own your business premises.

Disadvantages:

1) You have to be mindful of neighbouring properties and any restrictions over the land. In particular, if you are intending to use a former residential property commercially, you may need to change the registered use and make sure this doesn’t breach any covenants that restrict business use.

2) The purchasing process can be time consuming.

3) As the owner of the property, you are responsible for unexpected costs and maintenance.


Renting Your Business Property

Advantages:

1) You are tied in for a limited period and, upon expiry of this term, you have flexibility to move somewhere else if, for example, your business outgrows the space or you need to move closer to your customers.

2) Major maintenance work is usually the responsibility of your landlord’s facilities manager. You pay a service charge for this and the landlord has obligations under the lease to ensure the property is maintained to an appropriate standard. This may include grounds maintenance, air conditioning servicing and other expensive and time consuming tasks.

3) Central locations are more affordable under a short-term lease, which can give businesses a competitive edge, particularly if a central location is important to their clientele.

4) The initial capital outlay should be lower than what would be required to purchase a property.

5) It’s quicker to move into a rental property.

Disadvantages:

1) Renting is not an investment and is likely to cost more than buying a property in the longer term.

2) There is a risk that the landlord can enforce certain rights and terminate the tenancy before the end of the term.

3) When the property comes to the end of its term, the landlord can refuse to renew, even if you would prefer to extend for another period.

4) Depending on the terms of the lease, the landlord can often increase the rent, which can cause cash flow issues for your business.

5) You have only a limited ability to make a rented property your own and will often have to go through the landlord for consent.

6) A leased commercial space is a liability rather than an asset and adds no value to your business.

7) Leases often require the property to be returned in its original condition and format, often leading to costly charges for delapidations.


Is Ownership Right For You?

In conclusion, we believe that there are more benefits in purchasing a property if this is an option for you and your business. Whilst renting a property can be more financially feasible for growth companies, purchasing your business property gives you greater flexibility and certainty and is an investment long-term.

Speak to one of our advisers today for impartial advice on choosing the right commercial mortgage, bridging loan and other funding options.

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Topics: Commercial Property Finance, Commercial Mortgages, Property Investments

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