Rent or own guide and understanding yield

For many businesses, the decision to rent or own commercial property is a critical one that can shape the trajectory of growth, operations, and financial health. Whether you are a start-up searching for your first space or an established business looking to expand, understanding the pros and cons of renting versus owning can make all the difference.

In this blog, we will explore the key factors to consider, helping you make an informed choice that aligns with your business goals.

1. Assessing your financial flexibility

One of the most significant distinctions between renting and owning is the initial financial commitment. Renting typically involves lower upfront costs, offering greater financial flexibility. Businesses can allocate capital to other growth initiatives, such as marketing, technology, or hiring.

On the other hand, owning property often requires a sizeable down payment and financing, tying up funds that could be used elsewhere. However, ownership provides the potential for long-term equity growth and stability, which can be a valuable asset for the future.

Key consideration:

• Renting: Lower upfront costs, predictable monthly expenses.
• Owning: Higher initial investment, potential for long-term appreciation.

2. Business growth and scalability

For businesses anticipating rapid growth, renting can offer the flexibility to scale up or down as needed. Lease agreements can be adjusted, and relocating to a larger or more suitable space becomes easier.

In contrast, owning property may limit your ability to move quickly. Selling a property or acquiring additional space takes time and capital. However, owning can offer long-term stability and the freedom to modify the space to meet evolving business needs.

Key Consideration:

• Renting: Flexible lease terms, easier relocation.
• Owning: Stability and control over property.

3. Market conditions and location

Market trends and location play a crucial role in the decision to rent or own. In high-demand areas, purchasing property can be a sound investment, potentially increasing in value over time. However, in volatile or uncertain markets, renting might be the safer option, reducing exposure to market fluctuations.

Understanding the commercial property landscape in your region can guide this decision. If the area is experiencing rapid growth, buying may allow you to capitalise on appreciation. Conversely, renting in emerging areas can provide access to prime locations without the financial risk of ownership.

Key consideration:

• Renting: Lower risk in fluctuating markets.
• Owning: Capitalises on long-term market growth.

4. Operational control and customisation

Owning a property gives businesses complete control over the space. You can renovate, expand, or reconfigure the layout to suit operational needs without needing approval from a landlord.

Renting, however, often comes with limitations on alterations and customisation. While landlords may accommodate some changes, extensive modifications are typically restricted or require negotiation.

Key consideration:

• Renting: Limited customisation.
• Owning: Full control over space and design.

5. Tax benefits and financial incentives

Both renting and owning offer financial incentives. Rent payments can often be deducted as a business expense, reducing taxable income. Ownership, however, allows for depreciation deductions, mortgage interest write-offs, and the potential for property value appreciation.

Consulting with a financial advisor can help identify which option provides the best tax benefits based on your business structure and financial goals.

Key consideration:

• Renting: Immediate tax write-offs.
• Owning: Long-term tax benefits and asset appreciation.

Understanding property yield

Yield is one of the most critical factors to consider when evaluating property investments. Simply put, yield measures the annual return on the investment made in a property, expressed as a percentage. Understanding both gross and net yield calculations can help businesses make sound financial decisions.

1. Gross rental yield (for owners)

Gross yield measures the return before expenses and is a straightforward way to assess the viability of a property investment. A higher gross yield suggests better potential profitability.

Formula:

(Gross Annual Rental Income / Purchase Price) x 100

Example:

• Annual rental income: R2 400 000 (monthly rent of R200 000)
• Purchase price: R30 000 000
• Gross yield: (R2 400 000 / R30 000 000) x 100 = 8%

Is this worth it? Yes, an 8% gross yield is generally considered a healthy return in commercial property investment, making ownership a potentially lucrative option.

2. Net rental yield (for Owners)

Net yield accounts for operational expenses, offering a clearer picture of actual returns. This metric is essential for understanding the true profitability of a property.

Formula:

[(Gross Annual Rental Income - Annual Expenses) / Purchase Price] x 100

Example:

• Annual rental income: R2 400 000
• Annual expenses (maintenance, taxes, insurance): R400 000
• Purchase price: R30 000 000
• Net yield: [(R2 400 000 - R400 000) / R30 000 000] x 100 = 6.67%

Is this worth it? A 6.67% net yield is still solid, though if operating costs rise, profitability could decline. Comparing net yields to average market rates helps determine if the property is a worthwhile investment.

3. Target yields vary by investor type

Different types of investors have different yield expectations depending on their investment strategy and financial structure:

• Ordinary property investors (using debt financing): Yield must exceed the cost of debt (interest on the bond) to ensure profitability. For example, if a bond’s interest rate is 8%, a property yielding 10% would provide a 2% profit margin.
• Institutional or large equity investors (no debt to service): Property funds or REITs (Real Estate Investment Trusts) may accept lower yields, such as 8–9%, if the investment aligns with long-term strategies like stability or diversification.

Yield calculations provide valuable insights into the financial viability of owning property versus renting. They ensure that decisions are based on solid financial projections rather than assumptions, guiding businesses towards investments that align with their growth strategies.

View our available spaces

Whether you are leaning towards renting or owning, we have a range of commercial spaces designed to meet the needs of growing businesses.

View available spaces to rent

View available spaces to buy

Final thoughts

Ultimately, the decision to rent or own comes down to your business objectives, financial position, and long-term vision. Both options offer unique advantages, and the right choice will depend on balancing flexibility, control, and investment potential.

If you're unsure which path to take, our team is here to help. Contact us today to discuss your needs and explore spaces that align with your business goals.