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Renting Versus Buying Commercial Property

Jan 8, 2008
If you run your own business or intend to make 2008 the year you quit your job and start up on your own, then one of the issues you're going to have to consider is where you work.

Many small businesses are successfully started and run from home. But as the business grows, or if you intend to open a shop, then you will have to look at commercial property. And that opens up an interesting debate - do you rent, or do you buy?

There are distinct pros and cons to each, depending on what kind of business you will be running. So the first thing to do is look at your business plan and try to ascertain what kind of commercial property will be perfect for you.

If you are opening a shop you will obviously need somewhere with planning permission for retail and good access for customers. But do you need a lot of space to show off your wares, or a basic retail booth?

Is passing footfall going to be essential to the success of the operation, or do you think customers will go out of their way to find you? It's essential to work these things out in advance as they wildly affect the kind of property you will need.

A great location in the centre of town will give you your footfall, but at much increased costs. A property that's further out of town will be cheaper to rent or buy, but your marketing will have to work harder to attract customers.

Once you have studied this and know exactly what you need, it's time to make the big decision: buy or rent.

If you're going to purchase your own commercial property, the first thing you'll need is cash. Lots of it. Just like a residential house, a building for your business will require some capital and probably a commercial mortgage as well. Some mortgage deals require you stump up 10 per cent of the purchase price as a deposit.

This may have an impact on the cash flow and profitability of your business for a while. But on the plus side, you are investing in a long-term asset that one day you or your business will own outright. Commercial property will generate a rental income, making it a sound investment. But of course the value of any investment can go up or down, so don't risk your business or savings without thinking it through and getting plenty of advice.

If you need greater control of your cash flow, then renting is the route for you. When you pay a monthly rent to the owner of the building, you haven't got to worry about interest rate rises pushing mortgage payments up, or essential repairs eating into your budget. Wind blows the roof off one evening - not your problem!

But you have less flexibility. Owners can do whatever they like to their building without having to seek the landlord's permission (as long as it's legal, anyway). If you rent commercial property and want to subdivide an office with false walls, not only may your business plans be held back while the landlord looks at them, but you may even have to pay to have the work reversed when you leave. How would you feel forking out thousands of pounds to rip down improvements that cost you a small fortune to install in the first place?

So those are the main differences between buying and renting a commercial property. It's worth remembering that you will have to pay utility bills and business rates whether you buy property or rent. You may also be stung for stamp duty - certainly if you buy, and in some circumstances, when you rent premises too.
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