When should you buy a commercial premise?

When a business owner considers whether they should buy their own premises or invest in separate commercial property, they need to first determine whether they should lease the premises from where they operate or purchase it. Once that decision has been made, other investment decisions can be acted upon with more clarity.

This is an ongoing dilemma for many businesses.  When a business commences operation, it is important to concentrate on cash flow and establishing the business and probably wise to not outlay unnecessary capital until the business is established. Over time, the choice may be out of the owner’s hands, as growth and the need for more size among many other factors, may lead to the decision being made for the owner.

There are a number of considerations, drawbacks and benefits when decided whether to invest in your own premises versus renting it, and whether buying a separate commercial property is worth considering as an unrelated investment to the operation of the business. The starting point beside the below considerations, could be to seek advice from an accountant to model the costs of purchasing a premise and compare this to leasing it, and comparing this then to purchasing a separate commercial property altogether. The fundamental needs of the business must first be assessed.

Considerations when buying or leasing for your own operation or desirability for just an investment:

Floor space, visibility to a busy street, possibility for signage to attract foot traffic, parking (very important), location, from a proximity to prospective clients’ perspective, although with the internet this is becoming less important, depending on the business, and most importantly, budget, having the borrowing capacity, the deposit, this will ultimately determine the choices a business has to buy for themselves to use or for an investment.

Benefits

Owning an asset, which can grow to provide a nest egg is the most obvious benefit, wealth therefore can be increased on two fronts rather than just one. The first one being goodwill, stock and the client base, the next being a tangible, ‘growing in value’ asset, whether it be your own premises from which you operate from or a separate investment. The growing equity in the property is effectively, in itself, a separate business, that of being a property investor. This can then be accessed to provide the equity or capital which can then be leveraged off for expansion, working capital and weathering any storm that may come the business’s way.

Purchasing a separate commercial property versus your own, is a matter of comparing cost to rent your own premises, versus cost of having a mortgage against it, the location you are in, and comparing the opportunity cost with respect to whether there is a better location you could purchase a commercial property in purely for investment and whether earning rental income from another premises earns you or saves you more than purchasing your own premises and the growth on it in the location it is in.

Fitting out a leased premises to operate the particular business can be easier than a residential dwelling from a permission from the landlord perspective but it does provide more freedom to own the premises. A financial planner can advise if it is considered appropriate to purchase the premises with a self-managed superfund (SMSF), if an SMSF is even worth setting up in the first instance.

Negatives

It is arguable as to whether the loan repayments on the debt incurred by having purchased the premises puts the business owner into a more exposed position. If interest rates were to rise, it could eat into cash flow, however, rent rises by the landlord could have the same result. Often all out goings are paid by the tenant with a commercial property, so the normal costs, typically associated with owning a residential property, can be lumped onto the tenant anyway with commercial property, so buying a premises does not necessarily adversely affect the business, no may it be adverse to the business to purchase a commercial property just for investment purpose, separate to operational purpose.

There are of course tax consequences which need to be considered, even when running a business from home. If a person claims part of their home loan as a business expense, it could undermine the capital gains tax exemption on part of the house.

In conclusion, it depends on a number of factors as to whether a business, can, should, or must buy the premises they are in, or consider another commercial investment. There is always the underlying benefit of owning an asset whether its where your business is housed or not, this can benefit everyone, but it must not be undertaken if it could be to the detriment of the solvency and growth of the business. It is always wise to seek legal and accounting advice. Whether buying in an SMSF or not does require financial advice, and to determine if the business is able to purchase and maintain a business versus acquiring a separate investment, may well require accounting advice, but bear in mind that even with the advice to buy your own premises or another one, it is the business owner that must determine if all the considerations above are congruent with the decision. These considerations can be more important than the advice.

Andrew Crossley is a property investment strategist and mentor and the founder of Australian Property Advisory Group. He is also the author of the #1 Best Seller ‘Property Investing Made Simple’ (Busybird Publishing, $24.95) and the #1 best seller Property Finance Made Simple (Busybird Publishing, $24.95)). His books are in stores now. For more information visit www.australianpropertyadvisorygroup.com.au or contact andrew@apag.com.au