The decision of whether to lease a business premises or buy your own can be a difficult one to make. It depends on your current situation and the long-term goals for your business.
Being the owner of your business premises can offer a number of benefits in the right circumstances. Below we take you through what to consider, the potential benefits and the options for buying.
- 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 potentially renovation/fit-out expenses depending on the needs of your business.
- Cashflow – owning your own business premises requires you to have the cashflow for the ongoing associated expenses, including (but not limited to) loan repayments, rates, strata, repairs & maintenance and property insurance.
- The right size – If your business is in a growth phase then you need to consider the size of the premises you want to buy. In this case, the flexibility of a lease might be more appropriate for you.
- Start-up business – If you are just starting up then you need to consider whether leasing a small space alongside like-minded businesses, or being able to obtain a more desirable location while you are establishing your image, are more appropriate options than committing to a property purchase and loan.
- Commercial property loan – As a general guide, banks will only loan up to 70% of the market value of the commercial property that you are looking to purchase, which is known as a 70% loan-to-value ratio (LVR). Plan ahead to understand the deposit required for your intended purchase, plus on-costs such as stamp duty and legal fees.
Benefits of Owning Your Premises
- Asset & equity – a business premises is an asset that generally appreciates over time. The equity growth in the property gives you an opportunity to seek additional finance for business growth and can lead to long-term capital gains.
- Flexibility & control – owning your own premises gives you the flexibility to fit-out and make changes to the property at your own leisure – you can make the space exactly what you need.
- Tax – the costs associated with owning your business premises are generally tax deductible. This includes the interest on your property loan, repairs and maintenance, rates, electricity and any other ownership costs incurred. You may also be able to claim depreciation on the building itself.
- Security – owning your own premises secures your location. The right location can have a huge impact on the success of your business.
So you have decided that buying a premises is the right direction for you? Here are ways to move forward.
Generally you should try to hold passive assets such as a commercial property in a separate structure to your business, so that the asset is protected if the business faces financial difficulties for any reason.
Some of the options that you could consider when buying a business premises include:
- Personally – buying a premises in your name is the cheapest option as there are no fees to set up or maintain a structure. However, property should only be held personally if the individual has a low risk of being litigated. Sole traders and company directors generally do not fall into this category.
- Trust – holding property in a Trust offers asset protection. A trust also gives you the flexibility to distribute the rental income earned across your family group. The disadvantage of owning property in a trust is that trusts do not receive a Land Tax threshold. This means that more land tax could be payable compared to holding the property in another structure.
- Self-Managed Superannuation Fund (SMSF) – Your SMSF may be able to purchase your business premises, subject to the Deed and Investment Strategy of the SMSF.
A business property purchase in an SMSF may be funded by cash or via a Limited Recourse Borrowing Arrange (LRBA) i.e. a loan to the SMSF. Obtaining an LRBA is becoming increasingly difficult with many banks opting to not offer an LRBA product. LRBA’s generally require higher deposits and shorter loan terms than other loans.
Investing in a commercial property and weighing up your options can be a complex process, so it’s important to seek advice from a trusted business adviser. We have an experienced team available to assist you, whether during or after business hours, depending on your availability. Make your purchase work for you. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211.