Buying vs leasing commercial property
So your business needs its own space? Great! Now let the fun begin.
The decision about whether to buy or lease a commercial property is often far more complex than buying a house. You can plan for a baby, a sea change or to downsize your home in retirement, but trying to figure out exactly which property is best for your business can present plenty of challenges.
Here are some pros and cons for both buying and leasing a commercial property to help you make that choice.
It’s yours and you own it. It’s as simple as that. Want to change the internal layout? No worries. Got the space to extend the building? Go right ahead. Buy a property and you hold all the cards when it comes to deciding how best to manage the site.
James Reeves from L.J. Hooker Commercial says having the power and security to make all the decisions is important for many potential property buyers. “If you buy a property, you’re not answerable to anyone else in terms of things such as the owner wanting to redevelop the site and wanting to renegotiate with you and move you out,” Reeves says. “You’re in control of your own timeframe and your own destiny.”
You can sell it
Just like residential property, your commercial premises will potentially be growing in value while you operate your business from it. Commercial property is booming in some cities, and the right property can be a lucrative investment. On the flipside, if things take an unfortunate turn, it’s an asset you can sell if you suddenly need that money.
Your commercial premises will potentially be growing in value while you operate business within it.
Planning for the future is a lot easier when you know exactly how much you’ll be spending each month, and a mortgage on a commercial property provides a strong basis on which to base your business’ financial decisions.
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Residential property doesn’t come cheap, and the picture isn’t any brighter when it comes to purchasing a place for business. Not only are commercial properties expensive, Reeves says many sellers want big bucks up front.
“Financing commercial property purchases isn’t like financing residential. In most cases you need to put up far more deposit – anywhere from 25 to 50%, depending on who you are and how much money you have behind you,” he says.
In most cases, you may need to put up more of a deposit than you would with residential property.
Lack of flexibility
If your business really takes off, chances are you’ll quickly outgrow a property that seemed perfectly adequate just months ago. If you’re locked into a mortgage, you may not be in a position to move anytime soon, limiting your ability to grow your operation until you can sell and find something bigger.
Remember that extension and the changes to the internal layout? Guess who’s paying for those? Maintenance costs on a commercial property, particularly an older one, can be considerable, plus there are council rates and other annual costs to consider.
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Andrew Greenway from Gross Waddell says leasing a commercial property has plenty of advantages, the most important of which is having the ability to change and adapt far more quickly than if you own the property.
“If you are an investor on the side, you’ve got that ability to be able to go and invest elsewhere. You haven’t got all your money tied up in the building, Greenway says.
Reeves agrees, saying: “If I lease a property for three years and my business grows exponentially, I’m not stuck with this property that if the market’s not right I can’t sell and it could take me six months to a year. I’m not tied to that one property with such a fixed form of ownership and I can relocate somewhere else.”
If you’re an investor on the side, you can invest elsewhere.
Your money, your choice
It’s of huge benefit for businesses to be able to respond quickly to changes in their circumstance, or when fresh opportunities pop up.
Reeves says leasing allows business owners to react much faster when the need arises. “It doesn’t tie up as much as much of their equity and their cash, so they can do other things with their business, to acquire more businesses or expand,” he says. “If you wanted to open three or four businesses in a short period of time, you can’t if you’re buying everything.”
Buy a property and your expenses are more or less set. But leasing means your rent is almost guaranteed to increase in line with CPI each year, as well as attracting further premiums when it comes time to renew the lease and the landlord ups the cost.
Lack of control
Running a business is hard enough without someone else’s decisions directly influencing your ability to manage your own affairs. If your landlord decides to sell the property, chances are you’ll have to move a new one, which can not only be expensive in the short term but may also impact your customer base and hurt your bottom line.
You’re paying someone else’s mortgage
Rent on commercial properties ranges anywhere from just a few hundred dollars a month to hundreds of thousands annually. But whatever the cost, it’s a lot of money to be forking out to help someone else pay off his or her property.