The Pros and Cons of Buying Vs Leasing Commercial Property

When it comes to finding commercial space for your business, you may be weighing the options of buying a property and leasing one. While your decision will have a lot to do with your own financial standing, there are pros and cons to both paths.

If you find yourself in this situation, keep reading for what you need to know about buying vs renting commercial properties.

The Pros Of Buying A Commercial Property

It's A Good Good Investment

Commercial and industrial properties are considered to be one of the best ways to make your money work for you. In comparison to residential property, commercial space offers investors higher returns. "The Capex rate in South Africa is currently +11% for commercial properties, versus 5-8% for residential properties," says Ooba.

So, even if you wish to move spaces or your business goes in a different direction, you could sell your commercial space or rent it out.

Click here for commercial property investment tips so that you know what to look for when property shopping.

More Freedom

Owning your own commercial property for your business results in more flexibility and control over the space. If you want to change something (as long as your property is zoned for the change) you can do it without lengthy considerations from a landlord.

Also, if you have free space in your property, you can rent it out for an additional income.

Tax Benefits

Buying a commercial property can come with impressive tax benefits! One is that when a taxpayer secures a loan to fund a business transaction, interest incurred on the loan can be claimed as a deductible expenditure.

According to SARS, "A deduction is also available for a first time buyer who purchases a building or part of the building from a developer... Refurbishment of a building: 30% of the purchase price of that building or part of the building. New building: 55% of the purchase price of that building or part of the building."

The Cons Of Buying A Commercial Property

Big Deposit And Higher Costs

When it comes to financing, commercial and residential properties differ greatly in the eyes of the banks. Most banks will only finance up to 75% of a commercial property purchase - so you'll need a deposit of at least 25%.

You also may need to shell out a significant amount of money for renovations and to make the space conducive for your business to run.

Shorter Repayment Time

Banks usually require commercial property loans to be paid off in under 10 years, as opposed to 20 or 30 years for a home loan. For more on the important considerations and options available for financing commercial property, click here.

More Responsibility

Being an owner of a commercial property comes with great responsibilities! You will be responsible for all maintenance fees and costs involved with the upkeep and repairs of the property. This can be time-consuming as well as expensive, so it's important to set aside funds for this to maintain a safe and effective working environment.

The Pros Of Leasing Commercial Property

Less Upfront Costs

While buying a commercial property will set you back quite a bit, signing a rental contract comes with fewer expenses. The deposit can range from two to several months of rental for a commercial space, depending on the landlord.

Access To Prime Locations

Location is so important when it comes to commercial property. Depending on your business, you'll most likely want a space that's in a developed area close to amenities as well as public transport hubs and main highways. However, the better the location, the more expensive the property will be.

So, while a well-positioned commercial space may be out of your budget if you were to buy, the rental cost could be well within your means.

Fewer Responsibilities

One of the great things about going down the rental route is being able to let go of some responsibilities.

When it comes to maintenance costs and some repairs, the landlord would be financially responsible. Lease agreements for industrial and commercial properties are often longer and more complex compared to residential properties. Make sure you know exactly what maintenance you'll be responsible for, what maintenance your landlord is responsible for, and that any repairs you agreed on will be done in a certain amount of time.

For more important factors to consider when leasing a commercial property, click here.

The Cons Of Leasing Commercial Property

Less Control Of The Space

The property isn't yours, so you wouldn't be able to do whatever you want with the property. Any structural changes would need to be approved by the landlord. This limited control can have a negative impact on a growing business.

Rental Increases

While the initial cost to rent a commercial property is less than purchasing one, you can expect the cost of leasing the property to increase by eight to 10% annually. Also, this increase will go towards paying someone else's mortgage and not building up your own equity.

Lack Of Stability

Landlords can choose whether or not to renew lease agreements. If they choose not to, this could disrupt operations and leave a business scrambling to find another property that fits their specific needs.

Whichever way you go, buying or renting, there are pros and cons. The route you take is going to depend greatly on your long-term financial and business goals, as well as what's realistically available to you based on your business's financial profile.

One of the best things to do is get expert real estate advice so that you can be guided in the right direction and find the best property for your needs, no matter if you're buying or leasing. API sends out regular property alerts for people looking to be in the loop when it comes to commercial real estate. Sign up here!