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Business Property: Lease or Buy?

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08 / Apr / 2013

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Almost every business will have to make a decision about whether to lease or own their property at some stage.  The decision is not a simple one and depends on many factors including the nature and maturity of your business, the current property market and available capital.  We suggest you ask yourself the following questions when deciding whether to lease or buy.

How stable and well established is your business?

If your business is well established and you are confident that you can foresee your property needs for the next 10 years or so, then buying may prove an excellent investment.  Any improvements you make in the property will build long-term value and with a longer-term view you can expect to benefit from capital growth.

If you are uncertain about space requirements into the future then leasing will give you more flexibility to upsize and downsize as your business changes.  If the worst happens and the business is closed, the cost of buying out a lease may be significantly less than having a commercial property empty for months or being forced to sell at a capital loss.

How much capital is available?

The upfront cost for a business premise is generally high.  At least 30% deposit is usually required for commercial property, plus there will be taxes and improvement costs.  If your business is short on capital then you need to consider carefully whether you want to tie up available funds in real estate.

However, if the capital is available then commercial property could prove a wise asset choice – assuming you can find the right location at a good price.  Owning your premises will give you greater control and shelter you from the vagaries of rent increases.  Owning also ensures that no one can sell your business space out from under you.

How important is location?

If location is critically important then leasing may offer greater choice in selected locations.  When a prestige location is needed to reinforce your image then a lease arrangement may enable you to move into property that you would not be able to afford to purchase.   This is particularly important for retail, where location is critical to your business value.

How will this affect my cash flow?

Assuming a long-term fixed mortgage then the cost of owning will be relatively stable over the long term.  This could compare favourably to the variable cost of leasing with annual rent increases and lease renewals.

Given access to a relatively low cost mortgage loan it is possible that your cost-to-own will be close to the same as leasing.  Plus all your costs to run the property, including the interest on your mortgage, will be tax deductible.

However, it’s important to remember that as an owner you will be responsible for all maintenance and improvement costs, which can add considerably to the day-to-day cost of running your business premises.

Do you really want to be a landlord?

One issue often overlooked in the buying/leasing debate is that fact that owning your premises will divert focus from managing and growing your business.  Consider carefully how much of your time and attention is going to be required to act as your own landlord – would this be better spent building your business?

If you are weighing up between leasing and owning please come in and talk things through with us.  The decision is yours…. but MJ Accountants are here to help you see all sides of the debate.

Image compliments of Stuart Miles and freedigitalphotos.com

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