Is it better to buy or lease your business premises?

Weighing the pros and cons of buying vs. Leasing for your business premises

For business owners, deciding whether to buy or lease a commercial property is a significant decision that impacts cash flow, flexibility, and long-term growth. Both options offer unique advantages and challenges, so understanding the differences is essential to choosing the right strategy for your business.

Benefits and Considerations of Buying

Purchasing commercial property can be a powerful asset for your business, giving you control over the premises and offering potential financial returns.

Here’s what to consider:

Pros

● Building equity: Owning your property allows you to build equity over time. As you make mortgage payments, your stake in the asset grows, potentially increasing your wealth.

● Stability and control: When you own the premises, you have full control over modifications, improvements, and usage without needing approval from a landlord. This stability is advantageous for businesses that have specific spatial or operational needs.

● Potential appreciation and rental income: Commercial properties can appreciate in value over time, providing potential resale gains. Additionally, you may lease portions of the property to other businesses, creating an extra income stream.

Cons

● Higher initial costs and financing needs: Purchasing a property requires a significant initial investment, including a deposit, legal fees, and other closing costs. Financing can also be challenging for smaller businesses, especially if they lack sufficient cash flow or collateral.

● Limited flexibility: Buying can limit your ability to relocate easily. If your business needs change or if you wish to expand or move, selling or leasing out the property may involve additional effort and expense.

● Maintenance and management: Ownership means you’re responsible for all maintenance and repairs, which can add unexpected costs over time. This can impact your cash flow, particularly if your business is seasonal or if you encounter unforeseen expenses.

Benefits and considerations of leasing

Leasing can be an attractive choice for businesses looking to preserve cash flow and maintain flexibility. Here are the main advantages and considerations:

Pros

● Lower initial costs and flexible options: Leasing generally requires a lower initial outlay compared to buying, freeing up capital for other business needs. Leasing also provides flexibility in choosing location, with options to relocate or scale based on your business needs.

● Tax advantages: Leasing expenses are often fully tax-deductible as business expenses, which can provide financial benefits at tax time. This deduction can help offset costs and make leasing more attractive from a cash flow perspective.

● Reduced responsibility for maintenance: Landlords typically handle structural repairs and maintenance, allowing you to focus on running your business without worrying about property management issues.

Cons

● No equity building: Unlike buying, leasing does not allow you to build equity in the property. The monthly rental payments benefit the landlord and do not contribute to a long-term investment for your business.

● Potential rent increases: Leases may come with rent increases, particularly in high-demand areas, which can impact long-term budgeting. Some leases include annual increases based on inflation or market rates, which could add significant costs over time.

● Less control over property changes: Leasing usually restricts the modifications you can make to the premises. Even if certain renovations could benefit your business, these adjustments may require landlord approval and may not be permitted.

Which option is right for you?

Deciding whether to buy or lease comes down to your business goals, financial position, and growth plans. If building equity and having full control over your premises is essential, buying might be the right choice. On the other hand, if flexibility, lower initial costs, and tax advantages are priorities, leasing may better suit your needs.

Whichever option you choose, seeking guidance from a financial advisor or commercial property expert can help ensure you make a well-informed decision that aligns with your business objectives. Head to ufinancial.com.au

WITH DANIEL WALSH AND LEIGH DELEDIO FROM UFINANCIAL