Will it be better to rent or buy a business premises?
Deciding whether to rent or buy a commercial premise can be a tricky decision. You will need to ensure the location, zoning, size and fit-out are meeting your business needs, you will also need to decide whether renting or buying is going to be the most beneficial. Here are some things to consider when weighing up whether to buy or rent.
Positive outcomes of renting
If your business is relatively new, buying might be completely out of the question - in this case renting could be the solution to getting you established in the marketplace initially.
You have some flexibility to move when you need to. If you outgrow the space or the needs of your business change, for example 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, this would probably need to occur regardless of renting or buying. However, you don’t have to outlay a large chunk of cash for your deposit and cover stamp duty costs.
A well-established area may not turn over property as often, so renting might be the only option at present. Some very popular 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, you need to confirm if this is allowed by the landlord.
Negative outcomes of renting
You will most likely be paying to fit out a space that’s not yours, therefore you will be improving the capital value of an asset for someone else.
Location is very important to many businesses. 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 at any time in the future. 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 landlords decision making. This can be very challenging when doing business cash flow forecasting.
It can be very expensive to break a lease early if you need to relocate or close part way through a lease agreement.
Positive outcomes of buying
The property becomes an asset for you, your partnership, your company, your trust, your SMSF - whatever vehicle you ultimately choose to purchase the property within.
There is the potential for capital gains provided the asset appreciates over time, should you decide to sell it into the future.
You have the ability to customise the property to your businesses requirements, this could also add value to the property and to 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 also 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 any annual rent increases, your ongoing costs are fairly fixed, especially if you opt for a longer-term fixed rate on your commercial mortgage.
Your accountant or financial planner can help you decide what is the most appropriate way to purchase the property.
Negative outcomes of buying
If the property is being purchased on a standalone basis, you will need to contribute a minimum 20% deposit of the purchase price. You will also need to pay for a commercial valuation, legal costs 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.
The business will be liable for all ongoing maintenance costs - this includes rates, body corporate or other fees.
Some commercial properties can be more difficult to tenant if they are more specialised in nature - you should do your due diligent to ensure that there is demand for the selected property type.
Some home loan lenders will allow you to utilise the equity in other properties you may own, therefore you can fund up to 100% of the purchase price plus stamp duty and fit out costs.
Where to invest your capital is an important business 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 with your professional network will be critical. Your trusted Mortgage Broker working in collaboration 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 business cash flow.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.