If your business has outgrown the kitchen table and your home is overflowing with business materials and inventory. Whether it’s an office, a workshop or warehouse space, you’ll need to consider whether renting or buying premises is best.
The decision to rent or buy business premises isn’t always clear cut. While your budget will largely determine if you can afford to buy business premises, deciding to buy or rent also depends on the type and size of your business. Before making a decision, consider your needs and develop a business plan. This should detail how you expect your business to grow, factoring in costs for leasing premises or mortgage repayments.
Rent vs buying business premises
Many businesses prefer to rent premises. Rent accounts for a surprisingly low proportion of business costs, especially for office-based companies. Rents have also increased at a slower rate than other business costs, especially in the retail sector according to the Property Data Report 2017 by the Property Industry Alliance.
However, with interest rates at near historic lows and plenty of fixed-rate deals available, taking out a mortgage to buy business premises may be attractive. Some businesses invest in buying property and sub-letting parts of it to other businesses to cover mortgage costs.
Should I rent business premises?
Renting is a good option for start ups that can’t predict their revenue over the coming years. It means that if things don’t work out, you’re not left holding a mortgage on an expensive business property.
There are two broad types of business property leases: conventional or flexible. Conventional leases are usually sold on a square foot basis, and just include the space. You’ll be responsible for fitting out and maintenance, as well as costs such as insurance. Flexible leases are generally shorter term and cost more, but usually include furniture and office maintenance.
Advantages of renting business premises
- Renting is straightforward – you’ll need a deposit and the ability to cover monthly payments. Renting won’t tie up your capital and rents can be fixed. There’s also more choice with a wide range of options to suit all businesses at all sizes, from hot desking to industrial units.
- Business expenses – rent costs can be deducted from profits, meaning you’ll pay less Corporation Tax on your revenue.
- Flexibility – if you outgrow your current business premises, it’s easy to move out at the end of your lease into somewhere more suitable.
- You might not have an option – in some locations such as major city centres, renting is often the only option compared to buying a leasehold or freehold on a property.
- There’s less work – your landlord is responsible for maintenance and, depending on your lease, other amenities and services may be included, which means less time spent arranging these and more time running your business.
Disadvantages of renting business premises
- Restrictions on space – there may be restrictions on what you can do with the office space, and changes require landlord consent. You may need to reinstate the office to its original layout when the lease ends.
- Competition is tough, especially for prime locations – unless you sign a long-term contract, rents can increase and you may have to find new premises if faced with an unexpectedly high rental increase.
- You’ll be committed for the long term – you’ll need to keep paying rent even if business slows or you wind up your company, leaving you liable for additional costs.
Should I buy business premises?
Buying business premises is an investment and its value can increase over time. You can list the premises as an asset on your balance sheet, so it can be used as security to raise capital. However, property values can go down meaning it could be worth less over time.
Advantages of buying business premises
- Longer term cost benefits – you can fix mortgage payments for five years, far longer than a rental lease. You can also offset interest payments as an expense against earnings, lowering your Corporation Tax liability.
- Subletting income – should you no longer require the premises you can rent it to other businesses.
- Flexibility – buying premises offers more opportunity to create the space you need. You can choose the décor, layout and add your own branding.
Disadvantages of buying business premises
- Capital intensive – buying business premises requires capital. You may need to take out a commercial mortgage to buy premises if your business doesn’t have the cash up front. A large deposit – often up to 40% of the purchase price – may be needed.
- Profit impact – having a commercial mortgage may impact your business’ profitability. Mortgage payments may be affected by interest rate rises, leading to unexpected increases in costs. There are other costs involved in buying including stamp duty, legal fees and valuation fees, as well as ongoing costs such as business rates and buildings insurance.
- Due diligence – you’ll need carry out a survey to avoid problems, such as asbestos in old buildings. Hidden problems can be expensive to fix if not spotted at time of purchase.
- Planning permission – if you want to make significant changes to the building to suit your business needs, you’ll need planning permission. Check before buying to ensure your plans don’t run into problems with planning regulations.
- Maintenance – you’ll be responsible for repairs and will need to allocate budget for ongoing maintenance costs.
- Selling – selling office space can be slow and complicated, which may hinder your business should you need to quickly move to larger or smaller offices, or a better location.