Why else, says Van Biljon, does it happen so often that a business owner is content to let his rubbish pile up in the backyard while he rents a property, but cleans it all up as soon as he buys it? Certain aspects of property ownership are simply not clear-cut.
All the more reason, says Van Biljon, that business owners must take special care to apply clear thinking when they decide whether to buy a property. It starts with understanding why you want to buy it.
The decision would be relatively easy if every property purchase were a pure investment decision, but business owners often find themselves faced by more complex considerations. The main one is security of tenure. Renting a property leaves a business at the mercy of the landlord when the lease runs out. Having to move to new premises is severely disruptive for any business. For those that are sensitive to passing trade or have heavy machinery that will cost thousands of rands to transport, such a move can affect their very viability.
Fixing the tenure of the business is therefore an important strategic consideration that has a major impact on the decision to buy, as well as the negotiations around the price. The seller is usually well aware of the pressure on the business to secure its tenure, and will probably slap a premium on the selling price. Because the reason for buying goes beyond a pure investment decision, the buyer will probably have to accept paying a higher price, as long as it is within the bounds of reason and affordability.
A wave of emotion is always the wrong reason for buying a property. For example, “you have a fight with your landlord and on the spur of the moment you declare: ‘OK, then I’ll buy you!’” says Van Biljon. Such a quick, impulsive decision has no place in a project with such long-term implications as buying a property. It must be based on cool thinking about at least the next five years, and must be informed by lots of homework. Two areas have to be carefully investigated.
The first is the financial implications of buying the property. If paying the bond on the property costs more than renting – and it usually does in the beginning – can the business afford it? Remember that maintenance costs and rates and taxes need to be factored in.
Is the price you’re paying within reason, and if you are paying a premium, can it be justified? An independent valuer can be very useful in this regard.
What will be the likely resale value of the property? If the property is in a declining area, for example, the resale value will decline and the case for buying diminishes substantially.
A technical analysis, a detailed look at the property itself, is the second part of any prospective buyer’s homework. The location is the most important aspect that needs to be analysed, as well as the structural soundness of the building. A number of less obvious characteristics of the property also need to be considered, says Van Biljon. These include ease of access, the proximity of main routes, the availability of facilities such as electricity and developments in the area that may affect any of these.
The thoroughness of the homework will determine whether the property you buy will be a curse or an investment. The long-term nature of a property purchase means that any miscalculation made during the decision-making process will burden the new owner for a long time. Property is not easy to sell, and more often than not, the new owner will have committed to a long-term relationship with a financier. “You can’t simply tell the financier: ‘Sorry, this is not really working for me,” says Van Biljon.
A mistake made when buying a property means that you will have to carry a financial loss. Very often, when a mistake becomes apparent, it is better for the business owner to sell the property rather trying to hang on to it and throw good money after bad. Van Biljon acknowledges that it can be emotionally painful to come to terms with having to cut your losses, but once again, decisions must be taken with the brain, not the heart.
On the other hand, the investment value of a good property purchase goes far beyond the mere monetary returns. The business benefits of secure tenure, the stability of not having to move and the flexibility and freedom that comes from owning your own property all add to the value.
Financially, owning your own property results in a cash-flow advantage over the long term. Rents always escalate while bond repayments come to an end. It also turns into capital that can be unlocked for future needs.
For the business owner personally, ownership often has the advantage of a “forced” saving, forming a nest egg for when the owner retires. Even if the business dissolves, the rental or sales proceeds from the property can subsidise the retirement of the owner.
Finally, the emotional aspect of owning a property has its proper place in the equation after all. It is more likely that an owner-occupier will harness the pride that comes with ownership, and keep an eye on the small but important aspects of commercial property – the aesthetic appeal of a well-kept garden, a clean yard and a cared-for building. Not only does it help to keep the value up, but it becomes a happier place to work and build your business.