Should I Buy or Lease Premises for my Small Business?

Own or lease commercial property for your business

Figuring out whether to buy or lease a property for your business can be complicated. Making the smartest decision can sometimes come down to what’s available on the market in your area of choice. But, there are also some key questions to ask yourself.

Do you want the flexibility of a lease or the security of a mortgage?
Can you afford to buy, or do you need to keep the extra capital available?
Are you downsizing or upscaling?
Does your business need a shop front?
Is your capital best spent on a lease and internal refurbishment to suit your business rather than the huge outlay in purchasing a commercial property?
What is the commercial property market like in your area?

These are common questions, sometimes with complex answers. Commercial property lawyer, Anna Doughan, provides her thoughts on the pros and cons for both buying and leasing a commercial property.

The pros of owning

  1. You’re the boss: If you own the premises, you can redevelop, change, and manage the site to your desires (subject to any necessary mortgagee consents). You own all the fixtures and fittings and upgrades to property assets, and you are not paying off someone else’s mortgage.

Often the commercial property is purpose built for the previous owner, and it can be hard to find the right building to lease for your line of work. Refurbishing can cost more than you are willing to spend, particularly if you are not sure how long you will be leasing the premises, so buying in this instance could be the better option.

  1. Your business is an asset: If you buy the building, all capital improvement and refurbishment is improving the value of your asset that you can later sell, therefore it’s an appreciating investment. A mortgage builds equity and over time that equity can be used to leverage more finance and business investment.

If you don’t fill the whole premises with your business, you can sublease part of the building to other businesses and it becomes another income stream. This would help in recovering part of your mortgage repayments. There are also tax advantages and cost offsets available, such as depreciation on fittings and fixtures on commercial property. If you sell the business but retain the freehold premises, you may be able to use the rental income to fund your retirement.

  1. Lower ongoing costs: Upfront security deposits on leases and ongoing rent increases can be expensive. You avoid being locked into a long-term lease with rental payments and don’t have to worry about lease renewals and increases in rent if you own the building. There may be less disruption to your business as you are not at the whim of a landlord who may decide to sell or not renew your lease after the last option period expires.

If you are planning to buy a commercial property, it’s important to visit your local council and find out which permits and approvals you will need for fit out or improvement. You will often need a building or planning permit.

The pros of leasing

  1. More flexibility: Renting allows you to be more flexible when it comes to downsizing or upsizing according to your business changes.
  2. Less upfront costs: A lease would avoid tying up otherwise available funds with a loan. Leasing property means you don’t have capital that’s tied up for a long time in a mortgage and not available for spending on business opportunities and generating returns.
  3. The landlord looks after building issues: Land tax and ongoing maintenance and repairs to the building won’t be a liability to your bottom line.

If you are a start-up, renting may be the better option. As you observe the growth patterns of your business over the first five to ten-year period, then you can then use projections to base your decision on whether to lease or buy in the future.

If you lease a property you can deduct the entire amount of lease paid plus utility expenses off your tax liability.

If you are a business owner looking to rent or purchase a property, take the time to obtain legal advice before committing to a lease or a mortgage. Robertson Hyetts commercial property lawyer, Anna Doughan, can take you through the steps of deciding which option best suits your business and then assist with the purchase or lease.

Why not give us a call and let us do the hard work for you? Call (03) 5434 6666 today.