When to buy vs rent a business premises?

The decision of whether to continue to lease or buy a business premises can be a complex situation that the majority of business owners will find themselves in at some stage along their journey.

Those in this predicament are often asking questions, such as:

  • Is the business growing too big for its current space?
  • Do we want to lock in a strategic location?
  • Are we growing or looking to preserve wealth?
  • It is more financially viable to buy a property?

The answer to these questions depends on both the current business situation and the long-term goals, of not only the business, but of all business owners.

What do I need to consider before buying a premises?  

Any acquisition of commercial property that ties back to the existing business shouldn’t be thought of as buying a ‘business asset’. Instead, this process should be approached the same way as making any ‘investment property’ acquisition, with the business simply being the tenant.

Like any and all property acquisitions, the following steps need to be considered when buying a property.

Upfront costs

When purchasing a property, the upfront costs are significantly higher than the upfront costs of leasing a property. Ensuring you have the appropriate amount of capital available to invest in a property and run your business is key. You will need to budget for a deposit, appraisal costs and potential renovation/fit-out expenses depending on the needs of your business.

Cash flow

An investment property will have ongoing associated expenses, including (but not limited to) loan repayments, rates, strata, repairs, maintenance and property insurance. It’s important to note that most commercial leases have the ability to make the tenant (in this case the business) responsible for certain property expenses.

The right size

Finding the right property size for your business is vital. Thinking of your business as an independent third party, are you certain that the business will stay long-term or is it likely to outgrow the size of the premises? If likely to outgrow, this may not be the right property for your business needs. 

Commercial property loan

As a general guide, banks will only loan up to 60% of the market value of the commercial property that you are looking to purchase. It is therefore important to consider the deposit required for your intended purchase plus on-costs, such as stamp duty and legal fees, and other considerations including personal guarantees or general security arrangements.

Unsure of whether to buy or rent?

BDO’s Real Estate and Construction specialists are ready to help. Get in touch to explore which option is best suited to your business needs.