Buy or rent? Here’s what to consider for your business’s commercial property

Should you rent or buy a commercial property for your small business? Despite the rapid transition to hybrid working, many small businesses still find great value in a dedicated office, while many employees benefit from having a physical working space to retain a good work/life balance.

Some also find it useful or even a necessity to have a fully accessible space for collaborating with their teams, workshops and company get-togethers and for production or manufacturing. Regardless of whether you rent or own commercial property, it will affect your small business’ cashflow.

ALSO READ: Negative impact of licensing requirements on small business

Therefore, it is important to make an informed decision on which direction to take depending on a few factors that are unique to your business, says Kevan Govender, regional investment manager at SME financier Business Partners Limited.

“Making the most future-fit decision on whether to buy or rent commercial property must involve carefully weighing up the pros and cons of each option. Small business owners must also ask themselves several key questions about how they can maintain the financial viability of their ventures in assessing what would work best.”

To buy or not to buy?

Govender says one of the key advantages of owning commercial property is that you have free rein over any renovations and improvements you want to make. For businesses using the property as a point of sale, having the freedom to design the space to reflect your business’ aesthetic may be hugely beneficial from a branding point of view.

“Furthermore, commercial property could provide a useful safety net in the unfortunate event that your business needs to close down. In these cases, the property can be used as a way of earning rental income by taking on tenants. Alternatively, if at any time your business needs to downscale, a portion of the property can be leased out as an opportunity to earn additional income.”

ALSO READ: The four biggest myths about short-term insurance for small business

He says better yet, when the business owner retires, proceeds from selling the property can serve as a retirement cash nest.

“The most immediate downside of buying property for your business is rising interest rates. South Africa had 10 consecutive interest rate hikes over a period of just three years and future increases are highly likely. In this case, what you may be liable to pay on the bond as a monthly instalment, at the onset of purchasing the property, may increase over time and place strain on your cashflow.”

Advantages and disadvantages of renting

If investing in property within a highly pressurised economic climate is too much of a commitment right now, business owners can rent a space instead. Govender says one of the key benefits of renting is the ability to claim the monthly rental amount as a tax-deductible expense. In the case of businesses that own their own property, the capital portion of their bond repayment is not tax-deductible.

“However, a major disadvantage is that renting commercial property does not carry any equity or investment value. Monthly rentals will become hard expenses, which will cut into your revenue and produce no return on investment when it comes time to relocate.”

ALSO READ: How to build a recession-ready small business

Govender says you must carefully consider the advantages and disadvantages in the context of the current state of your business and the growth plan you have set out as an entrepreneur. “There is no blanket-solution for all small businesses. Making the best decision will always involve reviewing a few important metrics.”

Unique factors to consider

Govender says the first aspect to consider is whether renting or owning commercial property will increase the immediate cost of using a dedicated space. In some cases, the repayment due on a bond may be less or marginally more than the cost of renting the premises.

In other cases, renting property may give business owners access to sought-after, prime locations that may not be affordable as an option to buy. “Here, it is important to review whether the location is vital to maximising revenue.

“In the case of retail stores, location can be a make-or-break factor that should not be compromised. On the other hand, owning property in prime locations, such as central business districts and cultural hubs, could see the value of that property increase substantially over time and in turn be seen as a profitable investment that will reap positive returns and inject capital back into the business when it comes time to sell.”

He says another aspect to consider is whether the size and nature of the commercial property you intend to lease or buy aligns with your growth strategy. If scaling your business in terms of the size of your workforce or your business’ capacity for manufacturing is on the cards, renting may be more viable as a short-term solution.