When you run a business, at one time or another you may ask yourself whether it is worthwhile purchasing a property instead of renting. To help you make the most informed decision, below are a list of advantages and disadvantages to consider before you start searching on Commercial Property Guide for your dream business premises.
As a large amount of cash will be held up for your upfront costs of your purchase you may have to defer this cash from other areas of the business, this may hinder progress and sales success. In some cases if you have purchased the property for more than you sell the property you have lost the difference in capital, incurring yourself a capital loss.
Renting a property frees up any capital associated with upfront costs and mortgage payments. This can be distributed into the business to help grow your product line, employee numbers or business development.
Up front costs include Deposits (typically 30% of the purchase price), fit out costs, conveyances fees and agents fees. However purchasing a property will provide you with one easily budget-able fixed cost for your commercial property loan.
Upfront costs will also be incurred with a rental property but much less than when purchasing. These include moving and fit out costs. Renting a property incurs a rental amount, usually based on an annual CPI increase of approximately 4%; this can be subject to change depending on your lease agreement. This flexible cost will not be based on a percentage of your business success and is often one of the largest expenses of a business.
Purchasing a property may provide you with some amazing opportunities but may not be in the prime locations you are seeking.
Renting a property provides business owners with a larger choice of properties and flexibility of location. Where your business is located can affect your business greatly, (see article) for example if you are a retailer expecting high levels of foot traffic.
Businesses over the last 10 years have seen some of the best and worst economic situations to hit Australia. Most of these dips and troughs in the economy were not foreseen and were hard to prepare for. If your business has to change size rapidly to suit a new economy then a premises needs to be flexible too. If you own a premise however, you have little choice but to stay where you are and make do, this may incur larger costs than your business can afford.
Some businesses may require the ability to move their business quickly, perhaps because of rapid business growth. However if you have an asset like a property you may not be agile enough, with the average commercial property being on the market in Australia for some months, you may be held back from making a fast move.
Business owners go into business with the thought of seeing it thrive and making a profit. Change in a business is inevitable and change means flexibility including the option to change a product line, include a new range, improve performance and potentially grow headcount. Renting a property will provide a great amount of flexibility to move where your business needs to be, grow as your business grows and expand to multiple locations without incurring a huge purchase cost of buying a property.
Renting provides your business with the greatest prospect to strike when the opportunity presents itself.
Purchasing a premise can provide your business, brand, customers and employees with security.
If you are renting, you and your business could move around from place to place and this may hinder your brand as it may seem unstable to your employees and customers.
One of the good things about owning a property is you are free to do what you like with your premises (subject to council approval of course). This cost for maintenance and business improvements is yours to bear. This includes not just cosmetic fit-outs but repairs to building and its facilities.
Many leases these days will include a make good clause that ensures that the property leased will be returned to the owners in the same or better condition than originally leased. For example you may need to repaint the internal of the building, remove advertising signage and remove any semi permanent structures that you have erected including reception desks and doors.
As a property owner you can claim tax deductions for all costs associated with running, owning and maintaining a business space. Including interest on the mortgage and property taxes. Any tax advantages or depreciation schedules need to be confirmed with your accountant.
As a tenant you must include your share of the full amount of rent you earn in your annual income tax return. If the property is owned through a company, the rent is included in the company's tax return. You can also claim a deduction for certain expenses (see Support & Further Info below).
Purchasing a property ties up capital that could be used in the business. The payoff is that you have an asset on your balance sheet instead and property is equity. If your building is in an area of appreciating land value than the prospect of selling it for profit eventually is a positive one. At times of inflation, real estate, whether commercial or residential, can be a good investment. Selling a property can attract a capital gains tax, but there are many ways to avoid losing some or all of your profit.
Renting provides your business with available capital but not equity. There are other options to build equity in your business, whether you are an Entrepreneur or Business owners seeking to build a truly global brand.
As a property owner you have an obligation to maintain the property. The time restrictions of maintaining your own property may take focus off you running your business.
There are also many obligations that a tenant has for a rental property but these are typically discussed in the lease negotiation period.
If you have some spare space in your property you may have found yourself a new income stream. Subletting some spare rooms, desks or a whole floor may provide you business with a new way of adding money to your bottom line. Any improvements to the premises add value to your investment and property is a good investment during times of low interest and inflation.
Mortgage repayments of a commercial property may be much higher than rent payments for a lease so you may be saving yourself a large amount of cash. You also have flexibility to extend your lease or move to larger premises if your business grows.
On average, in Australia, commercial property can take months to sell. This means that if your business needs the capital quickly then you may not have access to it as it is tied up in your investment.
Your property could also be purchased via a self-managed superannuation fund (SMSF) which has its own pros and cons.
As a tenant you have little to no control over what the owner decides with the property. Everything from approving a fit out to selling the property is at the discretion of the owners. All these activities can disrupt the day to day running of your business. However a lease is not necessarily a long term financial commitment that means you can leave when your lease is up.
Support & Further Info
The ATO provides a lot of helpful Tax and other information for selling commercial properties. You could be thinking of buying or selling properties used for commercial residential matters (i.e. hotels, hostels and inns) or you may need a guide through the tax breaks, advantages and obligations you have as a new commercial property owner. The ATO also have laid out all the taxes and costs you may need to consider when you eventually sell the property you have decided to purchase.
The ATO also provide relevant information for tenants of leased properties, including information about income tax and GST and the deductions available to you and your business.