Is it better to buy or rent a small business premises?

One of the biggest decisions to make as a small business owner is the premises you'll be using.

There are nearly 2.2 million actively trading businesses in Australia as of June 30 2016¹, so coming up with a one-size-fits-all solution for each organisation's individual circumstances can be hard to come by. Nevertheless, here are some of the pros and cons of buying versus renting a small business property.

Buying

There are numerous advantages to buying a commercial property, although it’s important to ensure that this is the right decision based on your growth intentions, industry and current access to capital.

You (hopefully) gain an appreciating asset

Property prices are not always guaranteed to rise, but they can be an optional investment to make if you are confident in its ability to appreciate. Over time, the value of your commercial real estate could increase, potentially using the equity in your building for secured loans and other forms of borrowing that can spur growth plans.

You have more control

As a building owner with council approval, you can make structural changes and modifications to the building in order to fit the needs of your business without having to worry about approval from a landlord. You can also get repairs and maintenance work completed with minimal delays.

You can lease the building

Cashflow can be an issue for some businesses, but owning a commercial property could give some businesses an additional income stream. For example, you may choose to lease out unoccupied areas of the building for other purposes for regular rental income or otherwise rent out the property in its entirety.

Total cost of ownership can be lower

It is likely you may need a sizable chunk of capital upfront to buy a commercial property. However, your ongoing costs may be lower than renting, particularly once you've paid off a commercial mortgage. This could be a significant saving for your business in the long run.

Renting

We've examined some of the benefits of buying, but what about renting? Here are the key factors you should keep in mind if you're considering a commercial property lease.

You have the flexibility to move

Your business may experience significant growth or need to downsize its operations, which might make your current space unsuitable for your needs. Renting premises means you can simply wait until the end of the lease and find a new place to set up shop.

You don't have as much responsibility

With great power comes great responsibility, and for business owners who already have a lot on their plate, handling the day-to-day operation and maintenance of a commercial property could add extra work you don’t need. Leasing allows you to focus more on your business and spend less time worrying about repairs, insurance and other issues with the building.

The upfront costs are lower

As mentioned, you often need access to a large deposit if you want to buy a commercial property. SMEs sometimes don't have the funding necessary to invest in business premises, and might not want to spend it on real estate even if they do. Cashflow can be especially tight for businesses in their early days, so buying property isn't always the best use of available capital.

You may be able to sublet

Commercial sublets can provide you with an extra revenue stream while you are renting, which may be useful if you are planning to downsize but do not want to relocate completely. This additional money can be pumped back into your business to aid growth. However, there may be some legal considerations if you choose this option, so ensure that you seek some professional legal advice before taking the plunge.

Has this helped you decide whether buying or renting a small business premises is the right move? Would you like more information? Please contact our team at IMB Bank to discuss your options.

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