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Particulary when you are starting out, the decision to buy or lease commercial property could be crucial to the stability of your business. It is an important decision and one which needs to be considered well, as the wrong decision could cost you a great deal.
Leasing premises is the favoured option of most start-up businesses for the simple reason that most start-up businesses, particularly small businesses, are usually short on cash and to buy a property is an expensive venture. On the other hand, premises can be leased for a relatively low cost and a short-term commitment. Hence, when a business is small, it may be more efficient for the business owner to find a place to lease until the business can grow and generate enough of an income.
However, there is no denying that there can be some advantages to owning a property. This can be in cases where the success of a business is reliant on its location, then it may be beneficial to purchase because of the strategic importance of the location. Purchasing also allows the business owner to control the asset over the long-term. Further, even if the business does not succeed the premises could be sold or leased out for continuing income.
To help you decide between buying and leasing property for your business, there are some common points for and against both options. In the end, however, your decision should be made based on the needs of your own particular circumstances and business.
Assess the Options
Purchasing Commercial Premises
• Advantages
- Real Estate is an asset of the business.
- Real Estate can appreciate in value– bringing increased capital value for the business.
- Security and Continuity- as you will never be told to vacate the premises and be required to start again in
a new location.
- No landlord- as anyone who has rented property would know, a landlord is capable of causing much harm.
- The property can be used as collateral for taking out loans for other requirements, e.g. to buy new equipment, tock etc.
- You can sublet areas you do not require and earn side income from the premises.
- Tax breaks in terms of claims for asset depreciation.
• Disadvantages
- Buying a property involves higher initial starting costs which means funds which cannot be utilised for other purposes.
- Costs of all repairs, fixtures and fittings will add to costs incurred.
- There are extensive costs incurred both when purchasing and selling property, e.g. bank charges, legal fees, tamp duty etc.
- Selling the property may be difficult especially if the business fails, property prices may also fall in a bad economy leading to bigger losses incurred.
- Bank loans are costly, fixed and more difficult to renegotiate as compared to rentals.
- The loan repayments for purchases may be for a long period, e.g. over 10 years.
Leasing Commercial Premises
• Advantages
- Greater flexibility in choice and in relocating, as
requirements dictate, e.g. increase in rentals, better location for business etc.
- Less start-up costs as signing a lease incurs less cost as compared to purchase.
- Less costs incurred for fixtures and fittings which can be
shared or passed on to the landlord.
- More funds available for other business needs, e.g. inventory, equipment etc.
- Lease payments can be claimed as business expenses.
• Disadvantages
- An unreasonable or inflexible landlord can cause uncertainty and other problems.
- The lease options may be restrictive such as less freedom to make changes to the premises as the business dictates or restrictions in subletting.
- Money spent on rent does not contribute towards attaining an asset unlike mortgage payments.
- No asset depreciation advantages.
Making the Decision
Given that the decision to buy or lease is so important, it may be worth your while to get some expert advice on your options, and what might work best for you and your business.
People you could consult include:
• Accountants
Accountants will be able to assist you in assessing your capital requirements, e.g. inflow and outflow estimates, and work out which would be the better option in the short, medium and long term, for your particular business.
• Property Valuers
An independent valuer could guide you on the potential asset appreciation, rental prospects and other pertinent details for the areas which are of interest to you. The information they provide can be used as a guide in making your decision.
• Independent Financial Advisors
Financial Advisors could help you work out the financial implications of either buying or leasing. These could be consultants with their own practice or those in banks and other financial related institutions.
Most of the advice you receive will be of a quantitative nature. However there may be other considerations, of a qualitative nature, which should also be taken into account when arriving at a decision. Always keep in mind the interests of your business and ensure that your decision provides your business enough room to grow and prosper!
There are so many options available out there for business owners that it really does pay to do the homework and learn more about the various programs, grants, loans and other funding available, related to the option chosen.
INDUSTRIAL PROPERTY- MIDF Property Berhad
• Ready Built Factories
MIDF Property Berhad’s Factory Acquisition Scheme offers several schemes to assist manufacturers to own their factory and develop their businesses.
• Sales and Purchase Scheme
Completed factory buildings are offered on outright cash purchase. Financing arrangement is either by clients or with MIDF Property Berhad’s assistance.
• Factory Rental Scheme
Standard or specially constructed factory buildings are offered on a three-year tenancy with an option for subsequent renewals at very competitive rates (shorter tenancy period can also be considered).
• Deferred Sales/ Staggered Payment
Factory buildings can be acquired through monthly installments at negotiable terms and conditions.
• Purpose Built Building
MIDF Property Berhad will carry out the development in accordance to the clients’ specification in approved industrial sites.
• Project Management
MIDF Property Berhad provides professional services from building design to construction until the issuance of Certificate of Fitness for Occupation (CFO).
• Logistics/Warehousing Services
Flexible warehouse design and logistics services to meet our clients’ requirements and future need for expansion.
• Residentials
MIDF Property Berhad has also diversified into construction of residential properties.
