Commercial property: Should you let or invest?

Article summary

• If your business is just getting off the ground you may prefer lower upfront costs.
• On the other hand, if the commercial property is located in a good area, it may serve as a valuable long-term asset.
• Do you want the option to renovate the property, or easily relocate if your business outgrows it? The answer will affect your decision.

If you’re a business owner looking for office premises, you may be wondering which is better for your financial interests: Rent an office or purchase it?

The latter qualifies as a business investment, meaning you’ll be investing not just in your business but the location. Are you willing to take such a risk? We discuss the pros and cons of letting vs investing.

Renting commercial property: The advantages

• More flexibility. You’re not locked into a particular location and can move the office if necessary.
• The opportunity to negotiate better terms with your landlord. Other than negotiating with banks for a better home loan package, there’s not much you can do to obtain a more advantageous deal on a property purchase.
• Lower upfront costs. This is helpful if you’re just getting your business off the ground.
• You don’t have to worry about interest rates, unlike with property investment where interest rates can fluctuate, increasing the cost of the home loan repayments if they go up.
• No maintenance costs (for the most part).
• It frees up resources to invest elsewhere in the business.
• If your business outgrows the property, you can relocate to a bigger office.

Purchasing a commercial property: The advantages

• The office becomes a long-term asset. If it’s in a good location this makes it a precious asset.
• You can sell the office when you no longer need it, potentially acquiring a profit on your investment.
• You can’t be forced to vacate the property if the landlord wants to use it for something else. This is especially helpful if the property is in a prime location and you don’t want to lose it.
• You have the freedom to make renovations to the property and reforge it in the image that suits your business.
• If the property has a lot of unused space, you can sublet that space to other businesses.
• For some properties, interest on bond repayments is tax deductible.

Why not both?

You can initially rent the property but negotiate an option to buy with the landlord. This way, you can ensure you have the first option to buy if the landlord decides to sell the property.