Should you rent or buy your business premises?

Finding the right premises is one of the most crucial decisions when starting or growing your business.

Many firms are successfully started from home – that’s certainly the most cost effective place to base your business in the early years.

But as you grow, or if you have a business which needs a lot of space early on, you will need to find premises.

Here are the main points to consider while weighing up the pros and cons of renting versus buying:

Capital: To buy premises, you will need to sink some capital into the building, and probably take out a commercial mortgage as well. This may affect the profitability of your business for some time, and restrict your ability to find or borrow capital for new projects. On the plus side, you are investing in a long-term asset for the business… whereas with rent you are investing in someone else’s long-term asset! Remember that the value of property investments can go down as well as up, so don’t bet the business on a building.

Cash flow: Renting will give you greater control over your cash flow. Rents tend to be fixed, whereas mortgage payments will be affected by interest rate rises. Owners will have to pay for extra buildings insurance. For all businesses, there are other costs to consider, including utility bills, business rates and stamp duty (sometimes tenants have to pay this on commercial leases).

Risk: When buying a property, ensure you will be able to get planning permission for any changes you’d like to make. It’s also worth checking if the building has asbestos – if it does you will have an expensive bill to remove it.

Responsibility: As a leaseholder, it’s not your problem if the roof blows off one morning. As the owner it is – and you’ll have to deal with it while you also try to protect your business from damage. Try to imagine all the day-to-day things you’ll have to deal with as the owner… if toilets can get blocked, they will, and you’ll have to spend valuable time dealing with them.

Flexibility: As your business develops, will your premises continue to be suitable? Not a problem if you’re renting; just see out your lease and move to bigger premises. For owners it means selling up, or finding a tenant and taking out another mortgage elsewhere. The flip side is that owners can do virtually whatever they like within their own buildings, such as creating extra space. That may remove the need for a move. And it’s an option that may not be open to tenants.

Often lease agreements state the premises must be put back to the original state when they are vacated – that could mean thousands of pounds of improvement work you have done has to be ripped out.

Finally, here are some general tips from business owners with decades of experience in commercial property:

FOR RENTERS:

• Opt for short-term leases: You never know what’s around the corner, so in your first few years shorter leases are better. It may mean you pay a little more, but one day you may appreciate the ability to move quickly.
• Check how rent is reviewed: If you’re going to be facing a possible increase each year, it’s better to know about it from day one.
• Negotiate lower rent & better terms: Don’t accept the first rental figure without haggling. And if the price won’t drop, ask the landlord to throw in free extras, such as a lick of paint, a comprehensive clean of the building or free signage.

• Buy property in growth areas: If the government has announced a town to be a growth area, there’s likely to be initiatives to attract new jobs. Which means more employers who will need business premises. That could have a positive effect on the price of modern business properties. But be aware of being stuck with a dilapidated building in an unfashionable part of town.
• Don’t buy the first property you see: Just as with home hunting, you should view a number of premises, and consider how their size, location and proximity to amenities will affect your business and its staff.