Many businesses are faced with the choice between buying commercial property as a business investment or renting premises. This decision can have a major impact on a company’s finances and should only be taken after careful consideration and detailed planning – here are some key differences between owning your business premises and leasing them.
Business premises are an investment
Companies that buy their own premises are making a significant investment in real estate, which could provide excellent returns and increase the business’s asset value. Instead of paying monthly rental as an overhead, the company will be investing in bond repayments that should eventually result in full ownership of the premises.
Many company owners are keen to buy business premises for this reason, and if the difference between the monthly rental amount and the bond repayment isn’t too large, this may be a good strategy. However, there are a few considerations to bear in mind before buying premises:
- The current low interest rates make purchasing your premises seem like an attractive offer. However, interest rates may rise in years to come – business owners should ensure that they will be able to make their bond payments comfortably if interest rates start to rise.
- A deposit of up to 50% of the property’s value may be needed when buying business premises – this could have a negative impact on the company’s cash reserves, but is also a good strategy for taking excess cash off the balance sheet.
- Growing or downsizing? This can often happen and then forces a business to either take on additional premises elsewhere or to sell when they are not ready to sell or the market conditions are not right. Having a concrete idea of where the business will be in at least five years is suggested if one is contemplating buying their own business premises.
Leasing business premises provides flexibility
For businesses that aren’t keen on outlaying a significant amount of cash on a property purchase, renting premises offers several advantages:
- Moving to a new location is far easier when a business is leasing its premises hence making it a more flexible option and often allowing the company to move within the landlord’s portfolio at NO extra cost.
- The company will be able to use its surplus cash for expansion or product development
- Fluctuations in the real estate market won’t affect the company’s asset value if the valuation of the property decreases.
- Businesses that are keeping an eye on cash flow and want to limit their liabilities may opt to lease their premises for the moment, with a great variety of commercial properties being available to business tenants.