Buying your business premises
Should you lease or buy your business premises? There is no one-size-fits all answer to the question of whether you should lease or buy your business premises. Your decision must be guided by specific needs of your business. A considerable amount of thought should be given to the financial, tax and business-specific elements.
You must choose the options that will provide the required space at the lowest cost. Some believe that leasing is cheaper than purchasing, but this is not always the case, as the obligations on a lease can sometimes be similar to those when you are buying.
Here are some points to consider when weighing up whether you should lease or buy business space.
The upsides of purchasing your business property include:
- Fixed costs: Having a fixed long term commercial mortgage can give your business clear, fixed costs.
- Tax advantages and deductions: As an owner you can claim tax deductions for costs associated with owning, running and maintaining business space, including interest on the mortgage and property taxes.
- Financing: A mortgage loan can be used to finance your purchase, importantly the actual monthly amount required may end up being similar to that of a lease or lower if the interests rates on the amount borrowed are low.
- Access to equity: You may be able to use the property as a guarantee in business dealings with your clients, suppliers or partners.
- Additional income: If you have additional space, you have the opportunity of renting out a portion of the premises to a tenant to generate additional income. If you completely outgrow your premises, you have an option to rent out the entire space while moving into larger premises yourself, or to sell.
- Capital growth: If the building/space you purchase is in an area of appreciating land value, the prospect of selling it for a profit down the track could appeal to you.
- Control: Owning your business property gives you more control. You have increased security and freedom in which to run your business compared to lease agreements which can be restraining. For example, with owning your own business space you have the ability to stay indefinitely, you are not subject to terms of the lease.
There are also some disadvantages, namely:
- Lack of flexibility: You don’t know what the future holds. For example, if your business grows your office space may become inadequate.
- Agility: You will not be able to move quickly and easily, especially if purchase demand is low in the area when you are looking to sell. For example, the average time on the market for a commercial property for sale in Sydney is between nine and 18 months.
- Capital required: A significant amount of capital is tied up in upfront costs and maintenance. This deprives you from making better use of that money for other parts of the business and may impact cash flow.
- Capital loss: If you have to sell you property sooner rather than later, it may sell for less than what you purchased it for, resulting in a capital loss for the business.
- Maintenance and improvements: As the owner, you are solely responsible for maintaining the property and making any improvements.