Renting Versus Purchasing a Commercial Property

Renting Versus Purchasing a Commercial Property

If you're undecided about your next office space, here's a quick look at the pros and cons of renting versus purchasing a commercial property to help you decide which option best suits your business

By Jamie Costello

With many businesses being launched in a spare bedroom or from a kitchen table nowadays, there has been less of a rush for companies to acquire commercial premises. However, as SMEs expand, an official workplace quickly becomes a legitimate need. So, when you do eventually decide to move into a commercial property, is it better to rent or buy? We look into the pros and cons of both options. 

Renting a commercial property

Renting a commercial property is often a given for start-up businesses. Here are the pros and cons.

Positives

1. No big initial costs: If you don’t have enough working capital, then it’s best to play it safe and rent. Small businesses and start-ups are often unable to commit a lot of funds into a new property, particularly when they’re still relatively new.

2. No commitments: Renting is a great option for businesses that can’t predict where they’ll be in the next five years. It may be that they’ve doubled in size within that time, in which case they may grow out of their workplace very quickly. This is often the case with young tech companies. The option to rent allows for agility so you’re not committed to one place.

3. Fewer distractions: When renting, you’ll have more time to focus on your business, as all building maintenance is usually looked after by the commercial letting agents.

4. Tax breaks: If you’re a business in a rented building you may be entitled to some tax breaks such as lease payments, property insurance and utilities. 

Drawbacks

1. No equity: When you lease a property, you don’t accumulate any equity which means you don’t benefit from capital appreciation. Some contracts do have a rent-to-buy scheme, though this is definitely not as standard and it only allows you to apply a portion of the rent to the property.

2. Expensive rental prices: Of course, it depends on your location, but if your office is based within a city centre then you should be prepared to pay city centre prices. If this is the case, your monthly rent will typically exceed whatever your mortgage repayments would be.

3. Limited control: When you’re simply just another office in a rented building, there are considerable restrictions and limitations on what you can do within your rental space. This means you have no control over hikes in rent or maintenance fees. 

Purchasing a commercial property

Commercial real estate typically holds its value over time, as opposed to residential property. Therefore, this means it’s a long term asset, though there are disadvantages to such responsibility.

Positives

1. Accumulating equity: As we’ve seen, unlike with a rented property, a commercial property will allow you to build equity. You can then use the property as security if you ever need a small business loan in the future without having the stress of having to put up a personal asset as security. Similarly, if you’re paying in cash up front, then you immediately own the property straight away and it can prove to be a valuable business asset in the long-run. 

2. Rental income: When you own over 51% of your business, you’re able to rent your property out to tenants. If you’ve got extra space, you can even convert it into a shared workplace for freelancers or other micro-businesses. This means you can rent out space which could contribute to paying the mortgage on the property. Even if you’ve got a small building, you might want to rent out the bottom floor to a retailer, restaurant or café for extra income.

3. More control: Owners of a commercial property will have full control over it – with the exception of still needing to apply for planning permission. This means that there will never be any disagreements with the landlord or any negotiations if you want to change around the space or expand.

4. Owning an asset: Owning a commercial property will give you the opportunity to benefit from your property value increasing over time. Naturally, this can vary with inflation, supply and demand, and interest rates. 

Drawbacks

1. Upfront costs: Those initial costs may be too much to bear. Usually, you’ll have a down payment of 10-40% of the property’s value as a deposit before you can take out a commercial mortgage. You’ll of course need to pay the letting agents and due diligence fees too.

2. Insurance: If anyone is injured or hurt on your property then you are liable. That means you’ll need to protect your business with a liability insurance policy to prevent any lawsuits. It's worth noting here that when you rent, this is usually covered by the landlord. This insurance could be a considerable expense, particularly if you’re moving into a large building. Even if you rent out a room in the property, you’ll require additional insurance.

3. Rising interest rates: You’ll need to keep an eye on rising interest rates. Lower rates have enticed many entrepreneurs who are then left to pay more once interest rates rise. Low rates are never guaranteed, so if you’re buying a property based on those rates, it may come as an unpleasant surprise when you struggle to pay the rise. 

Moving your business into a new property is never a decision to be taken lightly. If you’re a small startup, renting is often the preferred route. You’re free to move should you expand, but you’re also not tied down to something too expensive if you need to downsize. With buying a property, you’ll benefit from control of the building – but this does mean you have the responsibility that comes with it. Before you make any decisions, discuss the choice with your accountant and lawyer if necessary. 

About the Author

Jamie Costello is an experienced business writer who has worked alongside several companies within the corporate sector. The topics he's covered range from employment to dispute resolutions. For this particular article, he drew upon his experience from working with residential conveyancing solicitors.