Should you rent or buy your business premises?

It’s a question most business owners will face at some point in their journey. The decision will depend on several factors, including the life stage of your business, your plans, your financial stability and the cycle of your property.

“Before we start weighing the pros and cons of renting versus buying a property, it might be helpful to consider a few questions first,” says Andiswa Bata, co-head of SME at ETFs. She suggests starting with the following questions:

  • Do you want to watch in a strategic place?
  • What are you currently paying in rent? Save yourself by buying the property (knowing that your current monthly rental cost may include some items that you would have to pay if you owned the building yourself – for example, municipal rates or even insurance to cope eventualities such as a roof leak)?
  • Renting means you are limited in terms of renovations that could be done to make the premises more suitable for your business purpose. If you were the owner, would you then have the opportunity to develop a more profitable space?
  • Do you need all that space initially? Could you have the opportunity to become a landlord for other entrepreneurs and rent a free space that you do not need immediately?
  • Do you need a tax cushion? Certain home expenses, including interest on loan repayments, are tax deductible.

“Answering these basic questions gives you a great starting point before you start weighing the choice between renting and buying,” says Malusi Mthuli, KZN Provincial Manager at FNB Commercial Property Finance.

It unpacks some of the key considerations to include:

  1. Initial costs

Although there are higher upfront costs associated with buying commercial space, the upside is that your business will own a long-term asset. Remember that you will most likely need to finance the purchase, which will impact your business profitability and could impact your ability to invest in new projects or equipment. If you choose to rent, on the other hand, the initial costs are lower, but you end up paying someone else’s deposit. You may choose to lease if your business is just starting out, to keep costs down while building your capital. However, if the difference between the rental cost and the potential loan repayment is minimal, you may consider buying and incurring the upfront cost. The capital growth of the property will likely exceed the initial costs and strengthen your balance sheet over time.

  1. Ongoing charges

Remember that not all properties are equal. If you are buying business premises, you need to assess the potential maintenance and renovation costs. Given the expected increases in electricity rates, it may be worth considering the property taking into account the suitability of generators and/or solar panels as an alternative source of energy.

  1. Is the property the right size for your business?

If you’re still building your business or have major plans for growth, it may be premature to buy a property now. You don’t want to invest in the purchase of commercial premises so that your business becomes too big in a few years. “In such cases, it may be more prudent to rent so that you can move quickly if necessary,” says Bata. You may need more or less space, your suppliers or customers may change locations, or you may find a more suitable property. On the other hand, you can find commercial premises with potential for further development. For the sake of business continuity, buying a property ensures that your business will not be disrupted by unnecessary moves due to the expiry of a lease or its profitability eroded by exorbitant rent increases.

  1. Location, location, location

If the property you’re considering is on what you think is a winning business location, you may prefer to buy to make sure you’re not going to lose it to an unaffordable rent increase or because the owner wishes to use the property. for something else.

Talk to qualified real estate appraisers about property values ​​in the area. If the commercial area is booming, buying commercial space can pay off in the long run while helping you avoid costly rent increases.

“Finally, you could compromise by asking the landlord to include an option to buy in your rental agreement. This means that you will have the first option to buy the property if the owner decides to sell. However, be sure to specify an option price or range and the circumstances under which you could exercise your call option,” concludes Bata. You would need to consult an attorney for advice if you are considering a lease-to-own opportunity due to the complexities associated with these agreements.

Comments are closed.