Pros and cons of buying or leasing commercial property
To buy or not to buy, that is the question. It can be a tough decision for businesses to decide whether it’s worth committing to buying a property, opposed to the possibly safer route of leasing. We’ve looked at some of the advantages and disadvantages of choosing a freehold or a leasehold property.
Advantages of Freehold
- You are not subject to rent reviews as you own the building and what’s more, business mortgage repayments, if applicable, are likely to cost around the same as rent.
- If the value of your property rises, you will benefit in the long-term if you eventually decide to sell.
- Making changes to your property can be much easier, with far less red tape. Updates and extensions may still require planning permission, but not approval from a landlord.
- If you over-compensate on space, based on future growth, you have the option of sub-letting part of your property to other businesses.
- Ultimately you have ownership over your own property, meaning you have the benefit of long-term stability.
Disadvantages of Freehold
- If your property is not well maintained, there is the potential it could fall in value, hurting your chances of a good return investment when you sell.
- Buying requires a hefty deposit and consider how the cash set aside for start up could affect the businesses profitability in the long run.
- Ownership of the property means you are responsible for all management and maintenance. Repairs and updates can seriously affect monthly outgoings.
- If you have too much or too little space, there is less flexibility to adapt. Selling can be time-consuming and there is less scope to move premises if there are any unforeseen changes in circumstances.
- Mortgage rates are likely to more temperamental than the fixed rent that is likely with a leasehold property. Rent reviews still provide set costs, while an increase in mortgage rates could affect financial security.
- There is far less commercial property for sale than there is to rent. On NovaLoca, only 23% of properties are listed for sale. Incidentally, the residential market is the reverse, with Rightmove having around 67% sales listings.
Advantages of Leasehold
- You will have greater control over your monthly outgoings and added security in terms of finances, as well as reduced upfront costs and fixed rates on rent.
- Some maintenance of the property may lie with the landlord, such as external dilapidation, which may reduce some of the financial strain.
- If you want to relocate your business, you have more freedom over when you can move. Short term leases mean you can adapt to any changes, such as growth or downgrading.
- There is more potential for negotiation with a rental property. You could benefit from a rent free period, which can be a great way to ease pressure on a business start up or balance out dilapidation and moving costs from previous premises.
- As stated above, there are more rental properties on the market than sales, meaning you have more chance of finding the ideal property for your business.
Disadvantages of Leasehold
- There are more restrictions on the changes you can make to your property, with planning permission and landlord approval standing in the way of any adaptations.
- Depending on the frequency of rent reviews, leasing can be costly in long run, as well as other possibilities such as upfront deposits eating into initial outlay.
- The landlord may pay some of the maintenance expenses, but you will be expected to pay for utility costs and internal maintenance, as well as repair work.
- You won’t have ownership over the property, meaning you miss out on the long-term stability you get with a freehold.
- When you leave the property you will be responsible for returning the property to its original state, which is potentially costly.
Please feel free to let us know what influences your decision when choosing a business premises by leaving a comment below.
You can find more blogs from NovaLoca here, including why having a mobile site for your business is essential and things to consider when choosing a business broadband provider.