Should you buy or lease your business premises?

For many business owners, buying their premises feels like a natural sign of progress. Instead of paying rent to somebody else, you own an asset that may grow in value and potentially support your long-term wealth strategy.

That can be a very good outcome, but buying is not automatically better than leasing. I have seen business owners become so focused on securing a property that they overlook the pressure it could place on the business supporting it. Others continue leasing by default when they may have the cash flow, stability and time horizon to consider ownership.
The short answer is that neither option is automatically better. The right decision depends on the business’s cash flow, future plans and the owner’s broader wealth strategy.

The decision is not simply about comparing rent with loan repayments. You need to understand what the business can comfortably afford, how much flexibility it needs and where the property should sit within your broader financial structure.
For me, the decision comes back to whether owning the premises supports the business you are building and the personal wealth strategy behind it.

Buying can provide stability, control and the opportunity to build equity in an asset. If you expect to remain in the same location for many years, ownership may also give you greater freedom to adapt the premises to suit the business.

However, a commercial property is both an investment and an operational commitment. A good property does not automatically make it the right property for your business, and a business that can obtain finance is not necessarily a business that should take on the purchase.

Leasing may be the stronger decision when flexibility matters more than ownership. A growing business may outgrow its premises. A business entering a new market may not yet know which location or footprint will work best. In those circumstances, tying up capital in property can restrict the very growth you are trying to achieve.

Buy or lease at a glance

The table is a starting point only. The financial outcome depends on the property, funding, lease terms, business performance and ownership structure.

Before comparing buying and leasing, I want to understand how the business is really performing. Is cash flow consistent? Are there seasonal or industry-related fluctuations? Is the business already carrying significant debt? What other investments will it need to make over the next few years?

The deposit is only the beginning. Buying can bring stamp duty, legal and due-diligence costs, finance fees, fit-out costs, rates, insurance, repairs and ongoing maintenance. If the purchase is funded, repayments must still be met when trading conditions soften, an unexpected expense arises or the property is temporarily vacant.

I would rather see a business lease suitable premises and retain enough working capital to operate confidently than own a property that leaves it financially stretched every month.

A useful buy-versus-lease comparison needs to go well beyond the advertised rent and the estimated loan repayment. I would model the likely cash position under both options and test how each one performs if interest rates, property costs or business revenue move against you.

For business owners considering buying commercial property in NSW, ownership becomes more compelling when the business is established, cash flow is dependable and the premises are likely to suit for years to come.

The strongest cases tend to be established businesses with cash reserves, a stable location and owners who want greater control over fit-outs and how the property is used. The purchase and holding costs still need to leave enough working capital for the business to operate and grow.

Ownership can also separate the value of the operating business from the value of the property. That may be useful later if the owner sells the business but retains the premises and continues receiving rent, although the tax, legal and asset-protection implications need to be considered before the purchase structure is established.

Leasing is not money wasted simply because you do not own the asset. Rent is paying for the productive use of a location without committing the same amount of capital or accepting all the risks of ownership.

It may make more sense to lease when the business is young, its space requirements are changing or its capital could generate a better return elsewhere. Leasing can also provide access to a location that would be unaffordable to buy and may make it easier to relocate, expand or contract as conditions change.

The lease itself still deserves careful review. Business owners should understand the term, renewal options, rent reviews, outgoings, make-good obligations and responsibility for repairs or fit-outs. Flexibility can disappear quickly if the lease terms do not support the business plan.

Ownership should never be decided after the property has been found. Depending on the circumstances, the premises might be held personally, through a separate entity or trust, or within an SMSF. We have a few clients who have used their super fund to purchase the commercial property occupied by their business. For those clients, the purchase itself did not draw on the business’s operating cash, but the business still had to keep paying rent. Each ownership option produces different outcomes for tax, asset protection, borrowing, cash flow, estate planning and the eventual sale of the property or business.

The operating business itself is not always the most appropriate owner. Holding a valuable property within the same entity as the trading business may expose it to operational risks and complicate a future sale of the business. On the other hand, adding an entity or SMSF simply because it sounds tax-effective can create unnecessary administration, costs, and inflexibility.

This is an area where the structure should follow the strategy. First, determine what you want the property to achieve, how long you expect to hold it, and how it fits with your business and personal plans. Then compare the available ownership options.

Before deciding, I want to know whether the business can fund the deposit and purchase costs without draining working capital, and whether it could still meet repayments or market rent during a slower period. I also look at whether the premises will suit in five or ten years, what other opportunities would be delayed and what happens if the business relocates, is sold or closes.

At North Advisory, our role is not to push every client towards property ownership. Through our business advisory services, we work through the advantages, risks and numbers so the owner can make an informed decision. If purchasing is appropriate, we can also help coordinate the financial and accounting structures needed to support it over the long term.

Our goal is to help you focus on long-term growth and wealth preservation.

Cayle Petritsch, Director and Wealth Advisor, is a leading financial advisor on Sydney’s North Shore.
He has helped many Australians maximise their financial positions and leverage opportunities, leading to sustained, profitable wealth accumulation.

Contact Cayle today.

General advice disclaimer
This information is general in nature and does not take into account your personal objectives, financial situation or needs. Tax and superannuation rules are complex and may change. Seek professional financial, tax and legal advice before making a property or investment decision.