What are the pros and cons of buying a business premises?
Are you a business owner thinking of buying your own premises? It could be a great way to gain more control over your business and benefit from rising property prices.
Here we take a look at the pros and cons of buying your own business premises, look at how to buy one, the types of funding available and answer frequently asked questions.
Table of Contents
- What are the pros & cons of buying business premises?
- How do I buy business premises?
- How to finance buying business premises
- Tax relief for buying business premises
- Frequently asked questions?
Pros and Cons of buying business premises?
Pros
- More control. If your business owns its own premises then you have more control over the future of your business. You may have worked hard to build up a reputation in a certain location. This could be at risk if a landlord decides to sell or not renew your lease.
- Don’t risk wasting money on refurbishment. Some businesses spend lots of time and money refurbishing a premises. If you own that building you’re not at risk of losing this investment if the landlord decides to sell the property.
- Certainty. Your business can plan for the future, knowing that the premises will still be available.
- Lower costs. Mortgage interest rates are currently very low so it may be cheaper to pay mortgage interest rather than renting.
- No increasing rent. Rental values tend to increase over time in line with property prices.
- Property wealth. If property and land prices increase in the future then your business may benefit if it decides to sell the premises in the future.
Cons
- Financial commitment. Your business will commit to a long-term loan.
- Interest rates may rise. Interest rates might rise in the future as they are currently at an all time low.
- Property values may fall. Property and land prices may fall in the future rather than increasing. If this happens then your business might lose money if it owns its own property.
- Tie up cash. Most commercial mortgages require a sizeable deposit of up to 25% of the property value. This will tie up cash that could be used elsewhere in your business.
- Less flexibility. If your business needs to move location or downsize then it may be easier and quicker if you are renting your premises.
- Repair costs. Your business will be responsible for repairs on the building.
- Building insurance. Your business will need to take out commercial building insurance on the property.
- Regulations. You will need to keep up to date with current fire regulations and rules on health and safety. Some leases also require this, depending on their terms.
- Stamp duty. Your business will need to pay stamp duty on a business premises. There are certain exceptions so you will need to consult your accountant.
- Tax rules. Your business may have a bigger tax bill if you buy your own premises. Professional fees and capital repayments on a commercial mortgage are usually not tax deductible.
What should I consider
If you’re wondering whether to buy a business premises then think about your future business plans. Will owning a business premise help your business to expand or secure your business’s future by having more certainty.
If you’ve decided that owning business premises is right for your business, then here’s what to bear in mind as part of your search:
- Location. Is the building in the best location for your customers, staff and suppliers?
- Cost. Is the cost of the building affordable for your business and how does it compare to your current rental cost?
- Facilities. Does the building have a suitable layout, lighting, toilet and kitchen facilities for your staff and customers?
- Cost of renovations. Does the building need extensive renovations to make it suitable for your business? It makes sense to get an architect to give advice on remodelling and the likely costs.
- Planning permission. Some buildings are subject to complicated planning rules that may affect how you can use or extend them.
- Security. Does the building have suitable alarm systems and does it comply with fire regulations?
- Access. Does the building have good parking for customers and is it easy to access for delivery vehicles and staff?
- Business rates. What are the business rates chargeable on the property?
- Energy bills. Some older properties have big heating bills as they are poorly insulated. The seller should provide an Energy Performance Certificate (EPC) that rates a building based on energy efficiency and likely energy costs.
How do I buy my business premises?
Just like residential house hunting, your business can search for available business premises on Rightmove, Zoopla and PrimeLocation.
It usually makes sense to use a specialist commercial property estate agent. They may know properties that are available but not currently listed. You can use a Zoopla search to reveal specialist commercial estate agents in your location.
Once you have made an offer on a building you will need to make sure the following is in place:
- Commercial mortgage. These are available from banks, brokers and specialist lenders. Most lenders require a substantial deposit of around 25% and interest rates are usually higher than residential mortgages.
- Building survey. A surveyor will assess the value of the property and if it is structurally sound. They can also advise on costs to rectify any problems with the building.
- Quotes and financing arrangements for alterations or refurbishment. Some lenders offer short term bridging loans to help with finance costs.
- Planning permission and buildings regulations for any alterations. A local architect should be able to advise on planned alterations and if they are likely to get planning permission and meet with building regulations.
- Commercial conveyancing. You should use a specialist commercial conveyancing solicitor. They will perform checks and searches to make sure the seller has legal title over the property and prepare the sale contract.
- Building insurance. Your business will need suitable building insurance in place once the sale completes.
How to finance buying my business premises
If your business is buying its own premises then there are various funding options. The most common option is probably a commercial mortgage. This works like a residential mortgage with an agreed interest rate and often a long repayment term. Some lenders offer a discounted period for 2-5 years so you may choose to remortgage once this discount period ends. Many lenders require a 25% deposit for a commercial mortgage.
Where can I apply for a commercial mortgage?
Commercial mortgages are available from banks, specialist lenders and brokers. Here is a list of some providers:
Tax relief buying business premises
If your business buys its own premises then some of the costs may be tax deductible. In general, the interest paid on a commercial mortgage is tax deductible, but you won’t be able to get tax relief on any capital repayments. Legal and professional fees related to the property purchase are also not tax deductible.
You should consult your accountant as the rules are complicated.
Other alternatives to buying your own business premises
Buying your own business premises is a big financial commitment and usually requires a large cash outlay. If you are considering buying your own premises but not sure if it is the right decision then here are some alternative options:
- Continue renting - this will give your business more flexibility and not tie up capital. You should consult with your accountant or get legal advice to make sure you understand the terms of your lease. Understanding your lease can help you with future decisions about whether to buy a premises or continue renting. Your lease should set out any break clauses and the rules for rent review in the future.
- Move rental property - if your lease if coming to an end or you have a break clause in your rental agreement then you could consider moving to a different rental property. You may be able to find a building in a better location and more suitable for your current needs. Make sure you take advice to understand any penalties or dilapidation costs in your current rental agreement.
- Buy property as an individual - it is possible to buy a business premises as an individual and rent it to your business. You should consult your accountant to understand the cost and tax implications of this option.
Frequently asked questions
Buying a business premises is not necessarily a cheap option compared to renting. Here are some of the extra costs you should consider:
- Deposit. Most lenders require at least a 25% deposit for a commercial mortgage. This will tie up working capital that could be used elsewhere in the business. If your business has cash-flow problems in the future then you may be forced to take out other expensive borrowing.
- Arrangement fees. These fees are charged by the lender and can often be added onto the mortgage total.
- Legal and surveyor’s costs. Solicitor’s costs and valuation fees will need to be paid upfront.
- Interest payments. These may currently be cheaper than rental costs but it is possible that interest rates will rise in the future.
- Stamp duty. Your business will owe stamp duty on the purchase. There are some exceptions so you should consult your accountant.
- Higher tax bill. Some expenses relating to property purchase are not tax deductible expenses. You will need to consult your accountant.
- Building insurance. Your business will be responsible for getting suitable building insurance.
- Repair costs. Repairs on the building and alterations to comply with regulations will be the responsibility of your business.
If you already own a business premises but it is no longer suitable then you may be considering selling it.
A commercial estate agent should be able to advise on steps to take to get your property ready for sale. You need to plan for extra costs such as removal costs, refurbishment, legal costs and estate agents fees. Consult your accountant to understand any tax charges for selling your business premises.
If you have an empty business premises then you may be considering renting it out.
Get advise from a commercial estate agent on the possible rental value and any repairs or alterations you need to make. You also need to get legal advice on your responsibilities as a landlord and make sure your lease is properly drafted. Also, speak to your accountant to understand the tax implications of becoming a commercial landlord.