There are many reasons why you should consider taking out a commercial mortgage to buy your own business property. Ownership is the key to wealth, but it is far from being a risk free enterprise. There are factors that every budding entrepreneur must consider or face being exposed to far too much risk. This handy step by step guide will show you what to look out for as you consider your first commercial mortgage.
The Good Stuff: One of the best bits about buying a commercial property using a commercial mortgage is that the mortgage payments are usually not much higher – in fact they could even be lower – than your monthly rental payment while you were a tenant. So your cash flow may be improved by such a step.
Commercial lenders will often allow you to take out your loan on a fixed rate basis. This guarantees your monthly cost, giving you and your company some stability. Unlike rent payments which can rise substantially every year, a fixed rate commercial mortgage will remain the same. This could save you a considerable sum over the medium term.
Being your own landlord has other advantages to. You can decide to sublet any of the space within the property without being in breach of a tenancy agreement. Finding alternate income streams, particularly during a recession is very important, and if you can offer accommodation to other businesses you will always have a steady stream of customers. You may need permission from your lender to do this but it makes the property a far more attractive investment opportunity.
If you also have surplus space it means that you can expand your business later on without having to go to the expense and inconvenience of moving. You can utilise the additional space that you have at your disposal to expand as your company does.
Owning your own commercial property means that you also benefit from any appreciation in the value of the property. Property prices tend to rise over the long term and so owning property means that you will benefit from any increase in its value when you come to sell it at a later date. Furthermore, the interest payments on your commercial mortgage are tax deductible.
Cons: One of the main reasons why businesses are deterred from taking out a commercial mortgage to buy business premises is because of the amount of deposit that you have to put down. A lender will often require between 25 and 50 per cent of the purchase price as a deposit. Many businesses simply don’t have that level of capital available whilst many others have better uses for the money.
Even after expansion has been considered and you’ve still outgrown your premises, moving to a larger base of operations can be a slow process. The buying and selling process for a commercial property can be a patience tester and then time consuming when you do find a buyer, with a lease the wrapping up process can be an easy process in comparison.
Remember that mortgage payments are the start, not the end of the expense. If you own a commercial property a lot of expensive legal obligations fall to you. You are responsible for the upkeep of the building, for safety and for insurance. Unlike renting, where you could rely on the landlord to pick up the tab for repairs, now you are the landlord, and the results can be costly.
There are genuinely good reasons for taking out a commercial mortgage and buying property, but as with all things, you must be prudent before parting with any money. Make sure that you are buying an asset, not a liability, and think carefully about the pros and cons, as mistakes in commercial property ownership can be costly.
Howard O’Gollegos writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.
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