Any business person who is making decent business will need to make a decision about moving his garage operation to a legitimate business premise. Making this decision is no small task. There are numerous factors you need to consider before moving ahead. The biggest decision that need to be made is whether to lease or purchase the business premise. Each has its pros and cons, which makes it very difficult to make the decision. The best answer anyone can give is it depends on your situation. Here are some tips to can consider to come up with a decision that suits your needs.
Taking the Plunge
Freelancers often start working from home. The overheads are low and in the early stages of running a business, this arrangement works perfectly. Once the business grows, however, you will need more space. There are plenty of co-working spaces out there, where freelancers can hot desk or rent a space in a communal workspace, but it’s not ideal if you have clients to entertain or you need storage for stock. It’s usually at this point that small business owners decide to take the plunge and move into their own premises.
Desirable properties sell fast. They are also quickly snapped up by tenants. Once you have identified a few suitable properties in a desirable location, you need to move fairly quickly or you could lose out on a great deal, but the important question is to decide whether you want to lease or buy. Both have their pros and cons. If you buy a property, it becomes an asset on your balance sheet. If you lease premises, it is a liability instead. Of course, aside from accounting issues, there are many more issues to consider, so let’s take a look at the main points.
Leasing a Property
There are several benefits of leasing a business property. When you lease, you pay a deposit to secure the property, plus a fixed monthly rent to the landlord. There will be some room for negotiations about rental payments and the terms of the lease, but how much wiggle room you have depends on how desirable the property is, so expect to pay the advertised price and accept that any deduction is a bonus.
Any property maintenance is not your concern. The landlord will have to fix the roof if it springs a leak, or replace windows if they rot. In most cases, all you are responsible for is keeping the place clean and replacing the carpets if necessary. However, you must read the small print in the lease to check what you are responsible for, as some landlords will try to make you pay for repairs that would normally be taken care of by a landlord.
The second advantage of leasing a unit is that you are not tied down for the duration. In most cases, you will be able to break the lease at set intervals, known as ‘break clauses’. In some cases, you might only need to give a month’s notice of your intention to leave. This is useful if you anticipate fast growth or decline. It gives you the option to upgrade or downsize fairly quickly.
Thirdly, any lease payments you make are tax deductible. Lease payments are an expense, so the cost is deducted from income when calculating tax liability.
Lastly, leasing enables business owners to move into a high-end property in an area where buying is cost prohibitive.
Buying a Property
Buying a property is a serious commercial decision and not one to be taken lightly. You will probably need a mortgage, so the process could take months to finalize once you have found the right unit. However, if you do decide to buy, there are some key advantages.
Properties are an asset. They normally appreciate in value. Over time, you will build equity in the property, as the value of the property rises and your mortgage debt falls.
Your costs should remain fixed. Landlords are free to increase rental payments within the terms of the lease, but mortgage payments can be fixed for the term of the loan.
Any interest you pay on the mortgage is tax deductible. You can also account for depreciation when you do your annual accounts (speak to your accountant about this).
Lastly, once you own the building, you can sub-let any or all of the space, which will generate income.
There are, of course, some disadvantages to buying a commercial property. Firstly, you are responsible for all repairs and maintenance, which can be costly. Secondly, you can’t upgrade or downgrade fast. Lastly, if you want to base your business in an affluent part of town, it will be very expensive to buy a unit.
Write a list of pros and cons before you make a decision and consult with your accountant for detailed advice.
