We come across a lot of clients who ask us the question of whether they should be investing their spare capital into buying the property they currently operate in or, rather renting and keeping themselves cash-flow-friendly.
This choice of renting vs. buying office space can have far-reaching implications for your company’s future, and it’s crucial to weigh the pros and cons carefully.
7 questions to ask when faced with renting vs. buying your office space.
- How is your business doing and can it currently support a large purchase?
- How is the local economy doing?
- Does this property fit into my long-term strategy?
- How long do I plan to stay on the premises?
- What is the commercial property market like in my area?
- Are property prices worth it at the moment?
- Do you want to commit to a fixed location for an extended period?
The advantages of buying your business premises
- Equity Building: As you pay off your mortgage, you build equity in a valuable asset that can appreciate over time.
- Tax Benefits: Owning a property can offer tax deductions, including mortgage interest, property taxes, and other expenses.
- Stability and Control: Owning your space means you're not subject to rent hikes or lease term changes. Plus, you have the freedom to modify the premises to suit your business needs.
- Potential Income: Owning a larger space than you need allows you to rent out part of it, creating an additional income stream.
However, buying isn’t without its drawbacks.
The disadvantages of buying your business premises
- Upfront Costs: Purchasing property requires a substantial initial investment, including a down payment, transfer costs, and potential renovation expenses.
- Illiquidity: Your capital is tied up in the property, which might limit your ability to invest in other areas of your business.
- Maintenance Responsibilities: Owning means you’re responsible for all maintenance and repairs, which can be costly and time-consuming.
- Shorter Repayment Time: Most banks will only finance up to 75% of a commercial property purchase, requiring the loan to be paid off in under 10 years (versus 20 or 30 for a home loan).
The advantages of renting your business premise in South Africa
- Flexibility: Renting can be a more flexible and less burdensome option because it offers you more flexibility as well as growth opportunities
- Stability: more stable view of your monthly costs without the unforeseen expenses that come with owning a property.
The disadvantages of renting your business premises in South Africa
- No return: You don’t get the upside of the market moving and building an equity return.
- Less control of the space: The property isn't yours so making any structural changes would need to be approved by the landlord. This can harm South African businesses due to electricity and water issues which might require investments in alternative sources of energy like solar.
- Rent Increases: You’re at the mercy of the landlord for rent increases and lease terms.
- Potential Instability: Lease renewals aren’t guaranteed, which could force relocation at an inconvenient time.
The decision to buy or rent hinges on your business’s financial stability, growth projections, and need for flexibility. Consider consulting with external advice to understand which option aligns best with your business strategy and goals. Remember, what works for one business might not be the best choice for another. Your decision should be as unique as your business!
