Should you own or lease your office space?
every business goes through natural cycles. The start is the most stressful time where money is flying out the door and there's not much coming back in!
Eventually though, things start to become more established. cash flow evens out and in doing so, one of the questions you might have is, "I love our office buy why are we spending all this money on the lease when we could own it ourselves?"
In my time dealing with many businesses over the years, I’ve found that the decision for a business to own their premises is actually very similar to the one taken when deciding to buy your family home.
In this article, I want to briefly explore three valid reasons why buying an office space could be a fantastic idea and three points as a rebuttal.
1. LEASE PAYMENTS MAY ACTUALLY BE HIGHER THAN YOUR LOAN REPAYMENTS
Last Tuesday the RBA decided to keep the cash rate on hold at 1.50%, setting a new record as we’ve now had 18 consecutive months of interest rates not going anyway. Just like we’ve seen with residential rates, commercial rates are the also lowest they’ve ever been.
However, at the same time commercial vacancy rates in Sydney are the lowest they’ve been in 10 years and prime rents have shot up more than 20% in the past 12 months.
2. CONTRIBUTE YOUR MONEY TOWARDS A GROWING ASSET
Whilst most of the mainstream media have reported heavily on how much residential property has grown in value over the past 4 years, commercial property has also seen a similar trend.
3. PROVIDES STABILITY FOR THE FUTURE
Just like owning your own home, owning your own office allows you never to be at the mercy of a landlord again. As previously mentioned, people renting office space in Sydney have had a very painful experience when their lease expires, and they have to renegotiate with their landlord again.
Of course, every investment carries with it risks to consider and commercial property is no different. Here are the biggest three you need to be aware of:
1. HIGH UPFRONT CAPITAL INJECTION
Probably the biggest sticking point is the amount of capital that needs to be put into a commercial property. Unlike residential finance where banks can lend up to 95% of the value of the property. In commercial it’s generally only 70%.
As an example, for a $1,000,000 property, factoring in stamp duty, bank and legal fees, you’ll generally have to have around $350,000 of available funds to secure the asset.
For a small business, that is a serious chunk of coin and some people could argue that money might be better allocated to different sources.
2. IT TAKES LONGER TO SELL A COMMERCIAL PROPERTY
Part of the reason why banks only lend up to 70% for a commercial property is that the market is more limited than residential.
As such, if you decided to sell your office, it could take a lot longer to liquidate this type of asset than if you were to sell a residential investment property.
3. LESS FLEXIBILITY TO CHANGE LOCATION
Buying commercial property involves a high upfront cost but also a high exit cost. As such, if you do decide to buy your office, you better make sure you’re really happy with both the office itself and the location.
Generally, it only really makes sense if you’re business is established and not looking to expand into the future.