Finance Apr 13, 2021

Should you rent or buy your business premises?

7 min read

Should you rent or buy your business premises?
Should you rent or buy your business premises?

Deciding whether to rent or buy a commercial premise can be tricky. Aside from needing to ensure the location, zoning, size and fit-out are meeting your needs, you will need to decide whether renting or buying is going to be most beneficial for you. Rent or interest and loan repayments can be one of the highest costs in your business. There is a lot to consider.

If your business is relatively new, buying might be out of the question entirely. If a loan is required, lenders prefer established businesses seeing regular, ongoing profit. You will also require a contribution either via a cash deposit or equity in another property.

Here are some things to consider when weighing up whether to buy or rent:

Renting pros

  • You have some flexibility to move when you need to. If you outgrow the space or the needs of your business change such as needing warehousing, additional meeting rooms or general office space.
  • There are less upfront costs associated with renting. You may need to pay for a fit-out (which you would probably need to do whether you buy or rent) however you don’t have to outlay a large chunk of cash for your deposit and cover stamp duty.
  • A well-established area may not turn over property as often, so renting might be the only option. Some High Street locations or business districts are tightly held as they have very high occupancy rates, good long-term tenants and see good capital growth.
  • You may be able to generate additional income by sub-letting (if allowed by the landlord).

Renting cons

  • You’re paying to fit out a space that’s not yours thereby improving the capital value of an asset for someone else.
  • Location is important to many businesses (cafes, restaurants and retail in particular) it may inconvenience your clients – possibly impacting sales – if you have to move at the end of your lease.
  • Your landlord could sell the property. Just like in a residential situation this can cause instability and may result in you having to search for new premises.
  • As with a residential property, each year you run the risk of your rent going up at the whim of your landlord. In turn, this can be a challenge when doing business cash flow forecasting & reducing your profit margins.
  • It can be expensive to break a lease early if you need to relocate or close part way through an agreement.

Buying pros

  • The property becomes an asset for you/your business/company/SMSF.
  • There is the potential for capital gains provided the asset appreciates over time, should you decide to sell in the future.
  • You have the ability to customise the property to your and your businesses requirements, this could also add value to the property and your balance sheet
  • You could generate additional income if you are able to rent out a portion of the space to other businesses. If you outgrow the property, it can be tenanted out
  • There’s no risk in having to pack up and move as there is no lease and nobody to sell the property out from underneath you.
  • You’re not faced with annual rent increases, your ongoing costs are fairly fixed, especially if you opt for a longer-term fixed rate on your loan.
  • Your accountant or financial planner can help you decide what is the most appropriate way to purchase the property (In your personal name, in a company or trust or in a self managed super fund).

Buying cons

  • If the property is being purchased on a standalone basis, you will need to contribute a minimum 20% deposit on the loan and stamp duty.
  • If you outgrow the space then your options may be more limited, it can be harder to pack up and find a new premise. Particularly if you have to sell the current one and buy another.
  • Ongoing maintenance costs are all yours including rates, body corporate or other fees.
  • Some commercial properties can be more difficult to tenant if they are specialised.

Did you know… you can utilise equity in other properties to fund up to 100% of the purchase price plus stamp duty and fit out cost. Ask us how.

 

Get yourself a professional entourage

Where to invest your capital is an important decision. The question is whether to invest your capital in a permanent business location or to spend it on other areas such as human resources, marketing or technology and rent.

When it comes time to make this decision, engaging your professional entourage is going to be key. A finance broker working in concert with your accountant, solicitor and financial adviser can support you in understanding the numbers behind each option and the impact it may have on your working capital and overall cash flow.

Get in touch