Buy vs Rent Business Premises: A Guide for Australian Small Businesses | IMB Bank
Is It Better to Buy or Lease Commercial Premises?
For many Australian business owners, the decision of whether to buy or rent commercial premises for their business is significant. The decision is often a strategic move with potential long-term implications for your finances, flexibility, and operational growth. There is no one right answer. The best choice depends on your business' needs, finances, and future plans.
At IMB Bank, we understand these complexities and the challenges you face. This article will help you understand the factors you should consider, and explores the potential benefits and drawbacks of buying and leasing commercial property for your business.
Buying Your Commercial Premises: The Upsides and Downsides
Owning your business' premises can be a powerful move, offering stability and the potential for long-term wealth creation. However, it also comes with significant commitments.
Advantages of Buying Commercial Property:
Building Equity and Investment: Each mortgage repayment contributes to building equity in a tangible asset. Over time, your commercial property can gain value, just like residential property. This can become a valuable asset for your business or personal wealth.
Stability and Control: Owning allows you to customise the space to meet your needs, subject to any approvals you might need (e.g. council or strata approval). You can make long-term improvements and enjoy a fixed location. This means you won't have to worry about lease renewals or rent increases.
Potential for Additional Income: If you have excess space, you may consider subletting a portion of the premises. The rental income is an additional revenue stream.
Tax Benefits: Business owners in Australia can often claim tax deductions for costs related to commercial property. This includes mortgage interest payments, depreciation, and other property expenses. Remember, always do your due diligence and seek your accountant’s advice.
Disadvantages of Buying Commercial Property:
Significant Upfront Costs: Purchasing office space requires a substantial commitment upfront. This includes a large deposit, usually 20-40% of the purchase price. It also includes stamp duty, legal fees, valuation costs, and possibly GST, depending on the property. These costs can tie up valuable working capital.
Ongoing Responsibilities: As the owner, you're responsible for all property maintenance, repairs, rates, land tax, and insurance. Unexpected costs may arise, impacting your cash flow.
Limited Flexibility: If your business needs to grow, downsize, or move quickly, selling a commercial property can take time. This can limit your options.
Market Risk: Property values can fluctuate. If you are thinking of selling in the near future, a downturn in the market could impact the value of your asset. Further, you will have to factor in capital gains tax once sold.
Leasing Your Commerical Premises: Flexibility vs. Long-Term Gain
Leasing a commercial property often appeals to commercial businesses seeking lower upfront costs and greater flexibility.
Advantages of Leasing Commercial Premises:
Lower Upfront Costs:Leasing usually needs a deposit of a few months' rent. Having paid rent in advance may allow you to keep more money for your business operations, marketing, or staffing.
Greater Flexibility: Lease terms are generally shorter (e.g., 3-5 years) compared to the long-term commitment of a mortgage. This offers flexibility if you anticipate rapid growth, downsizing, or a need to change locations.
Reduced Responsibility: The landlord is usually responsible for major structural repairs and maintenance, reducing your potential financial responsibilities.
Tax Deductible Expenses: Lease payments are generally tax-deductible as a business expense.
Disadvantages of Leasing Commercial Premises:
No Equity Building: Lease payments contribute to the landlord's wealth, not your own. You won't build equity or benefit from any capital appreciation of the property.
Potential Rent Increases: At lease renewal or during market reviews, your rent could increase significantly, impacting your bottom line.
Lack of Control: You usually need the landlord's approval for major changes or renovations when renting spaces. Your business activities and operations may also need to adhere to your landlord's regulations. Further, at the end of the term of the lease, you may not have the option to renew.
End of Lease Obligations: Commercial lease agreements often have 'make good' clauses. These require you to return the premises to its original condition at the end of the lease. This can be a costly task.
Key Factors When Deciding to Buy or Lease Commercial Property
To determine if it's better to buy or lease your commercial premises, consider these critical factors:
Your Financial Position: Assess your current cash flow, available equity, and borrowing capacity. Can your business comfortably manage a loan, including the deposit and ongoing costs? What are the costs of buying vs renting commercial property for your specific situation?
Business Growth Projections: If your business is growing fast, leasing can help. It offers the flexibility you need for future space. If you're unsure about your space requirements, leasing is a good option. For stable businesses with predictable long-term needs, buying offers more certainty.
Long-Term Goals: Are you trying to get a long-term asset and benefit from rising property values? Or is your main goal to keep more operational flexibility?
Industry and Location: Some businesses perform better in stable spaces that owners occupy. This includes manufacturing and specialised medical clinics. Others do well with flexible, high-traffic rental locations, such as retail shops and cafes.
Risk Tolerance: Leasing and buying commercial premises both come with risks. Buying requires the financial responsibility of regular loan repayments, and the possibility of repossession or needing to sell the property should you be unable to repay your loan. Leasing has its own risks. For example, the lessor may wish to sell the property, potentially disrupting your business’ operation.
When to Choose Which Option
You may consider buying if:
Your business has strong, stable cash flow and sufficient cash reserves for a deposit and associated costs.
You have a clear, long-term vision for your business location and foresee minimal need for relocation.
You want to build equity, benefit from potential property growth, and enjoy full control over your premises.
You're looking for potential tax advantages associated with property ownership.
Consider leasing if:
You're a start-up or a type of business with uncertain growth, requiring maximum flexibility.
Your business depends on a certain location. This place may be too costly to buy, or you may need to move often.
You prefer to minimise property management responsibilities and unexpected maintenance costs.
Ultimately...
The decision to buy or lease commercial property can be a pivotal one for any Australian business. By looking closely at your finances, growth plans, and long-term goals, you can work out the right path for the success of your business.
Ready to discuss your options?
To explore commercial loan options or other finance for your business, IMB's Business Bankers are here to help. Our experienced team can provide support and tailored solutions to help your business thrive.
Q: Is it better to buy or lease a business premises? A: It depends on your business's financial health, growth trajectory, and long-term strategic goals. Buying gives you stability and an asset that might grow in value. Leasing offers flexibility, and a shorter-term financial commitment
Q: What are the upfront costs of buying a commercial property in Australia? A: Upfront costs usually include a deposit, which is often 20-40%. They also include stamp duty, legal fees, valuation fees, and possibly a loan setup fee. It's crucial to budget for these significant initial outlays.
Q: Can you sublet a rented business premises in Australia? A: This depends entirely on the terms of your commercial lease agreement. Most leases require the landlord's explicit written consent before you can sublet any portion of the premises. Always check your lease and seek legal advice.
Q: Are commercial mortgage interest payments tax deductible in Australia? A: Yes, generally, interest paid on a commercial mortgage for a property used to generate assessable income is tax-deductible for Australian businesses. It's best to consult with your tax advisor for your specific situation.
Q: What responsibilities does a tenant have in a commercial lease? A: Besides paying rent, tenants usually pay for outgoings like rates and utilities, as stated in the lease. They are also responsible for minor internal repairs and often have a 'make good' duty at the end of the lease. Your lease agreement details the specific responsibilities.
Q: How long are typical commercial property leases in Australia? A: Commercial leases in Australia usually last from 3 to 5 years. They often have options to renew, like "3x3," which means a 3-year term with two 3-year options. Longer leases (7-10+ years) are also common, particularly for larger businesses or specific industries.
Q: What happens if my business outgrows its rented premises? A: If your business needs more space, you have a few options. You can talk to your landlord about a larger space, if one is available. You could also break your lease, but this might come with penalties. Another option is to wait until your lease ends to move to a better location, but this could slow your growth. Planning ahead is key.
Disclaimer: This article has been prepared by IMB and is intended to be of a general nature only. It is not intended to be relied on as advice. It has been prepared without taking into account your objectives, financial situation, or needs. Before acting on the information in this article, IMB recommends that you consider whether it is appropriate for your circumstances. IMB recommends that you seek independent legal, financial, taxation or other professional advice before acting on any information in this article.
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