- As you start a business and plan to grow it as fast and as best as possible, there are a lot of factors you need to take into account.
- One of those is deciding whether you need to buy your own business space or just rent it for a certain period.
- Both cases come with their respective financial benefits and downsides, so in order to make the right decision for your particular business, make sure you know all of them.
As business owners we are often faced with a number of difficult decisions – many of which are incredibly important to get right the first time around. For businesses that depend on a brick and mortar shop front, the decision as to whether we choose to rent or buy our business space is crucial, as it has the capacity to heavily influence all future operations.
Businesses within the realm of retail or food and beverage services in particular should think carefully before making any final commitments. For these sorts of stores, cafes, and restaurants, the overall customer experience is closely linked to their surroundings, and the atmosphere of the space itself can often mean the difference between whether or not a customer will choose to return.
As a property investor and CEO and Director of one of Victoria’s leading real estate agencies, Biggin & Scott Knox, I understand the problems associated with having an unstable lease, and I know just how damaging it can be to a business, but buying the business space is definitely not the best option for everyone.
To help you determine whether you should buy or rent, I’ve put together a list of some of the crucial factors to consider before deciding what’s best for your individual circumstance in terms of buying or renting your business premises.
1. Pay off your own asset rather than someone else’s
From an early age, many of us have had the same phrase drilled into our head, "Rent money is dead money." Although this phrase is usually linked to residential property, it’s equally true in relation to commercial property.
If you’re in a position where you can afford to purchase your business premises, I believe that doing so can offer some great financial benefits, and it will allow you to pay off your own asset through the business instead of a landlord’s.
When you own the premises, you act as both the landlord and tenant, and will have the option of arranging a higher rate of rent. This can serve two purposes. Not only is the cost of rental payments tax deductible through the business, but it also allows you to repay the mortgage on the premises much faster. Win-win.
2. Eliminate the risk of your lease expiring
You’ve finally found a great location – easily accessible, plenty of foot traffic, close to public transport – everything that’s important to you and your customers. But how long will your lease allow you to stay?
While commercial leases tend to be a lot longer than residential, once your time is up there’s no guarantee that you will be able to renew it, and you may have to pack up and find a new location.
As any retail or food and beverage business owner who’s been through this will attest to – you can’t count on your customers to follow you!
Reopening in a new location can be as challenging as starting from square one.
So you may need to completely revise your business model in order to bring in new customers who are local to the area.
Conversely, if you were to purchase the premises, you would completely eliminate the risk of having to relocate. The added security will not only offer peace of mind, but it will also allow you to better plan for the future.
3. Acquire capital growth on any renovations
When opening up a new retail store, café or restaurant, you are, of course, going to need to undertake some renovations and redecorating to make the best impression on your customers.
Renovations can be costly, but at the end of the lease period it’s the landlord who’s left with an improved property – while the business owner walks away with little to show for all their hard work.
However, if you were to own the property yourself, any increases in value would earn you capital growth, and the money you originally invested into revitalising the space would likely be returned to you once you decided to sell.
4. You’ll be locked in until you decide to sell or rent to another tenant
If you’re unsure of whether the premises will be your business's long-term location, think again before making a purchase. Buying the property is a major commitment, not just for your business, but for your own personal finances.
Should you decide the property no longer suits your business needs, you’ll have to wait until you’re able to sell the premises or rent it out to another tenant – or accept the financial burden yourself.
For smaller retail or food and beverage service businesses that are just starting out and, perhaps, looking to test the waters, renting a space will be an infinitely wiser decision, and will come with far less financial risk.
5. Will finances be stretched thin?
Ask yourself honestly; can you really afford the repayments if you were to purchase the premises? While the benefits of owning the property are appealing, the cost is something to be carefully considered, as commercial properties often require up to a 30% deposit – a fairly large sum of money, especially to someone in the process of establishing a new business.
For most retail and food and beverage business owners, it’s important to maintain a healthy level of financial flexibility and preparedness should the business experience a lull that causes income to slow. If buying the property is going to really stretch your budget, consider holding off making a purchase until you are in a more stable position.
6. Do I have any other options?
If you’re eager to secure a space long-term but can’t come up with the cash required for the deposit, you still have a few options in your arsenal.
- Consider going to the landlord directly and trying to negotiate a longer lease period. Speak to the owner of the property and explain your future plans for the business and your reasons for wanting a more secure location.
Highlight any plans you might have to improve the property and show the landlord what’s in it for them. By making it clear that the arrangement would be mutually beneficial, they will have a much harder time saying "no."
- If you happen to have a large amount of savings stored in your superannuation, it’s worth looking into whether you might be able to purchase the property through means of a self managed super fund. Generally, lenders will require a 70% deposit through your super, and the whole process is heavily regulated.
While there can be a lot of red tape to cut throughs, this isn’t necessarily a bad thing, as ultimately, it’s there for your own protection. By purchasing a business premises through your super, you’re essentially taking your retirement fund into your own hands, so the system exists to make it as risk-free as possible.
Before you make a decision on whether buying your business space is the right move for you, it’s a good idea to speak to a qualified financial adviser and get the best recommendations for your own personal situation. While owning your space can offer assurance and some great financial benefits, you may have to compromise on some of your business's freedom and level of flexibility, so it really is crucial to consider all aspects before you dive in.