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Buying v Leasing Business Premises

Discussion in 'General Business Chat' started by RPI, 15th Sep, 2016.

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  1. RPI

    RPI Well-Known Member

    Joined:
    31st Aug, 2016
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    Brisbane
    Hi All

    Being a big fan of property (hi property chat users) I would typically seek to buy the premises that my business operates out of (through a different entity). I am leasing and not looking at buying anytime in the next 3-5 years but thought it would be good to run a comparison

    Key Points

    At present we are expanding rapidly and capital contributions required to buy premises would limit that expansion.

    Also I can get office space in the CBD at $200-$300/m2 inc outgoings and $200m2 inc outgoings in the areas we expand.

    If i look at the CBD

    $1.3m purchase price with duty and costs $1.36m

    Assuming I could use other property to secure the capital contribution for the loan then at interest only $67,320 in loan repayments. Body Corp and Rates re $30k a year so that is rough cost of $97,320 for the year

    Or I can rent it for $82,200 a year and the landlord will spend another $100k on fit out.

    If I was paying down loan or I thought CBD office was going to increase in value soon then it may be more attractive.

    The other consideration is that in 3 years we are likely to need 2 x above space. If you own the property are you less likely to move to where you need to be if your related entity is losing $97k in income
     
  2. Blacky

    Blacky Member

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    Capital availablity is the biggest reason to lease.
    Generally a business will return several times more than a property in terms of return on capital (not always).
    In saying that the long term capital growth of the property can make future financing arrangments easier.

    As always theres no 'one size fits all'

    Blacky
     
  3. pinkboy

    pinkboy Member

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    29th Aug, 2016
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    I wrote a very detailed piece on my commercial purchase earlier this year over on PropertyChat. Here it is: My Commercial Purchase.

    Effectively, through good buying, and the power of being able to dictate my own lease, I've made a pretty solid purchase. I'm ~$30,000pa better off than leasing AND Ill own the building at the end. Ill effectively have a $1mil+ property paid off generating $100k pa for my SMSF.

    For your scenario, I'd look to do further investigation on ownership. You will also have depreciation on both the building, AND also if you are doing your own fit out (though the purchasing entity, or your current practice, depending how you fund the fit out). The real kicker is if you are purchasing, you will get capital growth and you will come to a point where you own the premises, not be paying out for 10, 20, 30 years on someone else's. Then you can divert funds to expand, or live off in retirement. You might even sell your practice and just decide to be a landlord at the right price.

    For me, purchasing has too many 'win/wins' than leasing.

    pinkboy
     
  4. hobo

    hobo Member

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    I think another consideration in the lease-vs-buy decision (not really relevant to your situation, @RPI, but just generally) is whether the business is fairly portable or not - ie does it rely on a specific exposure / location.

    If you are running a business that IS very location dependent, and are in a great spot but are leasing the premises, then you are always going to have that slight element of uncertainty / lack of control. If the landlord's plans don't include renewing your lease then it can be very difficult to find an alternative but equally well-placed location, even with a reasonable lead time. If you are able to buy a suitable property yourself, it eliminates that element of risk.
     
    Last edited: 15th Sep, 2016
  5. RPI

    RPI Well-Known Member

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    31st Aug, 2016
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    Location:
    Brisbane
    This is Spot on

    Breakfast Creek Hotel was the best example I can think of. End of lease and landlord took it all back, including equipment at depreciated value.