Should You Lease or Buy Commercial Property

The question of whether to lease or buy commercial property may seem obvious to some people, especially while we have historically low interest rates, but there are many things that should be taken into consideration before rushing into buying a property.

While purchasing a commercial property is a great move for many, that doesn’t automatically make it the right decision for everyone. So, if you’re thinking of purchasing a commercial property, this quick blog may serve as a helpful tool to assist you in determining whether that is the right move for you and your business.

If you’re looking for an investment property rather than a property to occupy with your own business, then not all of the points in this blog will be relevant to your circumstances. We will cover items that will be relevant to investors as well as to owner-occupiers and some points will be relevant for all.

Some key considerations:

Liquidity

Do you have sufficient cash or equity available to purchase a commercial property?

Typically, lenders will require a 30-35% deposit from you (in some cases less and in some cases more) in order to satisfy their lending criteria and risk management for commercial property lending.

This is a lot higher bar to clear than what is required for residential property lending.

Naturally, the larger deposit that is required means many buyers simply won’t have enough ‘up front’ cash or equity to satisfy the financial institutions requirements.

As an investor, if you don’t have sufficient deposit to buy a commercial property, you may still have sufficient funds for a residential property as an alternative.

As an owner-occupier, if you don’t have sufficient deposit, your only alternative may be to lease commercial premises.

Business Growth

Every business is different, so this point should be viewed as a core principle / lesson to be considered and applied on a case by case basis.

The key question is…is your business experiencing rapid growth?

If so, purchasing a property that you may quickly outgrow may not be your best option, especially if it ties up capital that you might otherwise put to better use within your expanding business.

If your business structure supports an operational model that functions efficiently over multiple locations, then this rapid growth may not be a barrier to buying property.

If however, the structure of your business is best served by having all operations under one roof, then you may be better off considering a more flexible property structure, like leasing.

If your business is stable and your accommodation requirements are not likely to change dramatically in the short term, then purchasing a commercial property may be a great option for you.

Motivation

What is your motivation for wanting to buy a commercial property?

Are you an investor looking for passive income? If so, you will likely be looking for a stable investment option with good cash flow. This may come at the expense of good capital growth, however.

Are you an investor / speculator looking for capital growth? If so, while the cash flow from the property may still be an important ingredient, you will likely be paying greater attention to other factors that may be good indicators of future capital growth.

This may include what investment is being made into local infrastructure by the government and/or private sectors, likewise what investment is going into larger infrastructure projects in surrounding regions that may have a direct impact on a local market (such as the North Connex that recently opened, improving reliability and travel times from Sydney to the Central Coast).

It may also include benchmarking the base property value against that of nearby markets, as this could indicate good underlying value, which should drive more buyer demand and then an uplift in values to follow.

Are you looking to owner-occupy and get out of the rental market; paying down your own mortgage instead of some else’s mortgage? If this is your motivation, then your decision may be driven less by the above factors and more by factors such as location, size, price and suitability of the property (i.e. accessibility, power supply, internal clearance, security etc).

Exit Strategy if you buy commercial property

Sound advice for most ventures in life is to ‘start with the end in mind’.

Thinking about what you will do with the property in the long term will help to guide your decision making when you are looking to buy the property in the first instance.

If you are buying a property to occupy with your own business, you should be mindful of how ‘fit for purpose’ or specialised the property is (or will be, if you make modifications) and whether this would be desirable for another buyer.

If the property features that work for your business are quite specialised, it will likely mean you have a much smaller pool of prospective buyers in the future who have interest in your property, at least at a certain value. If you are to appeal to a broader pool of prospective buyers, you may be forced to undertake costly works to mitigate the specialised nature of the improvements, or you may need to be prepared to adjust your price to reflect this cost that another buyer may incur.

If the nature of your business dictates that the property becomes highly specialised, then you should ideally consider that most of your value is derived from the operations of the business over the long term in the property, rather than banking on receiving a high value for the property once you no longer need it for your business.

If you are an investor, you should be considering how attractive the property will be to another investor (or to an owner-occupier) if you need to sell in the short, mid or long term. Are you in a position to hold the property for a lengthy period if it is not readily saleable or if you are in a tough market? Does the property you’re considering purchasing offer you any alternative exit strategies, such as a sub-division or redevelopment?

Summary

The above is by no means a comprehensive list, but these key areas are crucial to consider for anyone looking to purchase a commercial property.

If you have a solid understanding of what you intend to achieve from purchasing a commercial property, and you have a plan for how to achieve that, including how that plan concludes (i.e. your exit strategy), you will be in a great position to make the best possible decision to achieve your goals.

If you are considering a potential purchase and would like to speak with someone about your needs and goals, please contact one of our team today.