An inevitable dilemma for an owner of a growing business is whether they should carry on trading from their premises paying the landlord rent then giving the premises back after 2-5 or 5-10 years or whether they’re better off buying a long leasehold as a capital investment. There are pros and cons to both:
The most obvious upside is that it’s an investment which could appreciate over time and an asset that could be realised when necessary. Taking that further, if you need to raise funds to grow the business, that asset could be offered as security for a loan. There could be tax advantages (e.g. capital allowances on plant and machinery) and ultimately, the freedom to choose the design or décor and to stay as long as you like, or even rent out the space if you outgrow it further, offers massive flexibility.
However, it’s a big decision to ‘clear out’ built up funds to pay for a property outright, or otherwise, for a deposit to then get a commercial mortgage. And what about all the hidden costs that no-one tells you about – fit out works, VAT, stamp duty, legal and surveyors’ costs, mortgage costs, responsibility for maintenance – on top of your usual business running costs? You are also more locked in – it’s a lot harder to sell, than to give premises back at the end of a lease term.
With a fixed monthly outgoing, you can budget accordingly. Further, you know the end point of the lease, so you can mould the business accordingly. You might not have appreciated the location before moving there, you can work out what area is more suitable and, generally, it’s easier and cheaper to find a rental property.
Obviously, there would be no investment value, paying rent to line a landlord’s pocket is ‘dead money’. Leases are often subject to review and if it’s to market value, you could end up paying rent at a much higher price than you envisaged in a buoyant market. There is the possibility of having to pay a service charge which anticipates costs in the future which you will never see the benefit of because you don’t propose to stay. There are always hidden costs payable to the landlord under a lease.
Think about your core business needs, what you need from the space to meet those needs and what you can afford in the market, factoring unforeseen costs that you should be able cover, without breaking the bank.