Buy­ing vs rent­ing premises

One of the most im­por­tant de­ci­sions to make when get­ting a new small busi­ness up and run­ning is whether to rent or buy a com­mer­cial prop­erty. fin­week spoke to a com­mer­cial real es­tate agent about the pros and cons of each.

Finweek English Edition - - ON THE MONEY | SMALL BUSINESS - Ed­i­to­rial@fin­week.co.za A po­ten­tial buyer should ask the fol­low­ing ques­tions, ac­cord­ing to Hol­land: When read­ing through a rental agree­ment, the lessee should con­sider the fol­low­ing as­pects care­fully:

whether you are buy­ing a house or a com­mer­cial prop­erty, South African banks gen­er­ally re­quire a de­posit, which makes buy­ing prop­erty a cap­i­tal-in­ten­sive ex­er­cise. When buy­ing a com­mer­cial prop­erty, a busi­ness will see a large drain on its monthly cash flow when ser­vic­ing a bond and pay­ing for the op­er­a­tional costs as­so­ci­ated with own­ing a prop­erty, says El­ton Hol­land, di­rec­tor of the Ikon Prop­erty Group, which spe­cialises in com­mer­cial real es­tate.

“There is also gen­er­ally at least a 30% eq­uity re­quire­ment that a small busi­ness would have to take out of op­er­at­ing cash flow to fund the pur­chase of the prop­erty,” he says. An­other im­por­tant con­sid­er­a­tion is whether the pur­chased prop­erty would cater for fu­ture ex­pan­sion of the busi­ness, ac­cord­ing to Hol­land. “If not, then rent­ing might be a bet­ter op­tion for the short term,” he says. “The [up­side] of own­er­ship is the abil­ity to build the busi­ness’ net as­set wealth whilst util­is­ing the busi­ness to pay off the bond.”

If an en­tre­pre­neur de­cides to buy a busi­ness prop­erty, they would be able to claim back the VAT charged. Banks, how­ever, gen­er­ally re­quire that the busi­ness be in op­er­a­tion for at least three years, with three years’ fi­nan­cial state­ments on-hand and up-to­date man­age­ment ac­counts, ex­plains Hol­land.

WHAT TO ASK WHEN CON­SID­ER­ING BUY­ING: Is there good ten­ant de­mand in the area? Is there rental growth in the area? If the busi­ness fails, is the prop­erty eas­ily re-let­table? Is the price mar­ket re­lated? Will the prop­erty see fu­ture growth; will the busi­ness grow as a re­sult of the prop­erty? Of­ten premises are pur­chased for strate­gic pur­poses – this may be a shop in a good re­tail lo­ca­tion or a ware­house sit­u­ated close to a large client.

What con­di­tion is the prop­erty in? A pur­chas­ing de­ci­sion should be made based on the con­di­tion of the prop­erty; if it’s in poor con­di­tion, re­me­dial costs should be fac­tored in.

WHAT TO LOOK OUT FOR IN A RENTAL AGREE­MENT:

De­posit: Is the re­quired up­front de­posit rea­son­able and pro­por­tion­ate to the monthly rental?

Es­ca­la­tion: Ne­go­ti­ate the es­ca­la­tion of the rent af­ter 12 months. Don’t blindly ac­cept an 8% or 10% in­crease ev­ery year.

Fit­tings and fix­tures: En­sure that the con­tract stip­u­lates which fixed fit­tings, brought on by the lessee, can be re­moved from the build­ing once the rental agree­ment lapses. If this isn’t stip­u­lated, they be­come part of the build­ing.

In­sur­ance: In al­most all cir­cum­stances, the lessor is re­spon­si­ble for in­sur­ing the struc­ture of the premises at re­place­ment cost while the lessee is re­spon­si­ble for in­sur­ing the con­tent and equip­ment in­side the build­ing.

Use of prop­erty: En­sure that you un­der­stand the lim­its placed on the use of the prop­erty and stick to them.

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