Renting vs buying commercial property: What’s best for your business?
Buying commercial property for your business is very different from leasing commercial property or even buying your own home.
In Australia, we’ve grown up with the idea that we should buy our own home. The phrase ‘rent money is dead money’ has been drummed into our heads. This line of thinking often spills over into our business when deciding whether to lease or buy a commercial property but buying commercial property for your business is very different from buying your home.
Our clients often ask us whether they should be buying rather than leasing and the answer will differ for each business and what stage they are at.
However, there are some important things to consider:
- Banks will often require you to have a much larger deposit (around 30% to 50% of the property’s value) to borrow money to purchase a commercial property. Do you want to tie up so much capital in a property?
- The maintenance costs of an owned property can be significant. Wouldn’t you be better off investing that money into your business?
- Investing in a property means that you are likely to remain there for at least five years – Is your business likely to grow and need more room before then?
- Do you want to remain in the same location long-term?
Still not sure which is right for your business? Here’s how leasing and buying compares.
LEASING |
BUYING |
| Your property costs are spread out over the term of the lease | Initial upfront cost, but then lower ongoing costs |
| Cost of capital and structural repairs are paid by the landlord | Ability to make structural changes to the property to suit your needs |
| Free up capital to invest in your business rather than property | You have an asset (hopefully appreciating) for the business |
| You are able to lease prime property in a prime location with less budget restrictions | You have full control over the property and can make changes to suit your needs as your business grows |
| Ability to sub-lease if the property no longer meets your business requirements | You can sell the property if you no longer need it |
| You have the flexibility to relocate at the end of the lease if your business needs change | You can sell the property or lease it out if your business needs to relocate |
| No responsibility for the building if it is damaged due to fire, storm, floods, etc. | Never having to rely on landlords and agents to arrange building repairs |
Other factors that may influence your decision to buy or lease can include the use of the property and the type of business you operate. For example, if you are a car mechanic servicing a local area, the fit-out of the building (grease traps, wash facilities, vehicle hoists) could require a considerable cash outlay along with substantial structural changes that a landlord may not approve of. In this instance, you may consider purchasing the property to enable you to make changes to the property that fit your needs.
If you are operating a retail store, leasing the property would be a better decision in most circumstances, as the cost to purchase a retail space in a good location would be considerably high and there is an abundance of retail spaces available to lease. Should you wish to relocate to a similar property your chances of finding something suitable are quite high.
Both leasing and buying commercial real estate requires a big commitment for a business, both professionally and financially. It is important that you get it right the first time! Have a buy versus lease analysis prepared by your accountant or property specialist to determine what will work best for your business. Once you have made the decision whether to buy or lease, you need to ensure that the commercial terms of the contract or lease are favourable to you, and a professional can assist you with this.
NOW READ: How to purchase a commercial property using a self-managed super fund
NOW READ: Are you paying too much rent? A five-step commercial lease review
