Finding the right premises starts with one decision: Are you looking for a permanent or temporary address?
You’re a new business owner and although location is important to your, so are your finances.
“By leasing your commercial property, you have greater flexibility than when locked into paying off a bond,” says Leon Breytenbach, National Commercial & Auctions Manager for Rawson Properties. “However, buying means you’ll have the stability of a physical location, which is important if customers come to your place of business.”
While there are numerous factors to consider before picking out a premises, deciding whether to buy or rent your new office space is the first and most important decision you’ll have to make financially.
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“If you’re going to be staying in your building for more than 7 years, then you’re generally be better off buying than leasing, from a pure monetary standpoint,” advises David Waring is the Co-Founder of Marc Waring Ventures LLC. The longer you stay in the building the more the cost advantage for buying increases, however, if the extra upfront cash you invest in buying harms your business growth, then leasing is the better option.
Consider how long you plan on staying, along with the long- and short-term implications of either owning your business premises or signing a lease. Here are some factor to consider:
1. Length of occupation
As a tenant in a short term lease, the best option for you would be to sign a lease with multiple options to renew after the lease is up. This means if you go out of business or outgrow your space, you’re not stuck with the lease. You also get to remain on the property should it continue to align with your business needs.
“However, generally longer lease terms are more favourable to the landlord, so the longer the lease the better the negotiating position you are in for other parts of the contract,” says David Waring is the Co-Founder of Marc Waring Ventures LLC. “With this in mind, commercial leases are generally longer than residential leases, and leases with terms of 5 or even 10 years aren’t uncommon.”
If you decide to purchase the property, when the 10-year loan period ends, you’ll have a fully-paid commercial property which can boost your balance sheet.
2. Interest rate considerations
If interest rates increase more rapidly than expected and you have a bond loan, you could find yourself running into cash flow difficulties, says Andre Theron, investment specialist at Baker Street Properties.
“The expected rise in interest rates of roughly 1% over the next 12 months is still better than the average 8% annual rental escalations,” he explains.
You cannot predict the interest rate fluctuations from the onset, but you can plan for them when deciding how you’d like to acquire your new property.
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3. Tax implications
Generally speaking, an entire rental can be listed as a tax deductible expense, whereas the capital portion of a bond repayment is not tax deductible, however, purchasing commercial real estate through a separate entity, gives you a tax advantage.
You can then rent the property to your main business and if you set the rent at your bond payment and depreciation, create a tax deferred stream of income.
“At the end of the day you must weigh up the needs, finances and preferences of your business against your choice to buy or lease your premises,” says Breytenbach.
“The decision is specific to your operation and the life cycle your business finds itself in. It is essential that the end decision is an educated choice and not just an impulsive one.”
- Look at your current and future financial needs before deciding to purchase or lease a property
- Consider the need to adapt and perhaps relocate based on your business’ growth path
- Weigh up the needs and preferences of your business against your choice