Buying your business premises vs leasing

A café owner with six years of steady trade gets a call from the agent: the landlord is selling the building, and the tenant gets first look. The rent is about to be reset at a new owner’s discretion. Buying suddenly feels urgent, and so does the question of whether it is smart or just emotional.

It helps to slow the decision down and put it into numbers before the pressure arrives.

What is the real question: rent or repayments?

Most owners start by comparing the monthly rent with the monthly loan repayment, find them similar, and conclude that buying is “like paying rent to yourself”. That framing hides most of the cost of buying. A loan repayment is not the whole picture of owning. Add:

• the deposit and the cash that goes into duty, legals and valuation
• rates, insurance, maintenance and, depending on the building, land tax
• the return that deposit could have earned if it stayed in the business
• vacancy risk, if you ever outgrow part of the space

On the leasing side, add what rent will be in year five, the make-good bill at the end, and the risk of having to move a business customers know by its address.

How do the two options compare side by side?

Factor	Buying	Leasing
Upfront cash	Deposit plus duty, legals, valuation	Bond or bank guarantee, plus fit-out
Ongoing cost	Repayments, rates, insurance, repairs	Rent plus outgoings, with reviews
Control	Full, within zoning and council rules	Limited by lease terms
Flexibility	Selling takes months, and costs money	Easier to move at lease end
Capital growth	Yours, up or down	Landlord’s
Tax	Interest and some costs deductible; depreciation and capital gains issues to plan for	Rent generally deductible
Risk	Property market and loan	Rent increases, non-renewal

Ask your accountant how each fits your structure. That is where the tax lines in the table become real numbers.

What does the opportunity-cost test look like?

Here is an illustrative example. A Brisbane joinery with $400k available could spend it as the deposit and costs on a $1.5m workshop, or keep it as working capital while leasing a similar workshop. If the business can use that $400k to buy a CNC machine that adds $150k a year in contribution, the machine out-earns the building’s rent saving. If instead the money would sit in an offset account, buying probably wins.

The question is rarely “can we afford it?” It is “what is the best use of the next dollar of capital?” For a business growing quickly, the answer is often the business. For a mature business with surplus cash and a long horizon, it is often the property.

When does buying usually make sense?

Buying tends to fit when most of these are true:

1. You expect to occupy the same site for ten years or more.
2. The business is profitable enough that repayments and outgoings are covered with room to spare. A lender will test this under serviceability rules.
3. The property is generic enough to resell: a standard industrial unit rather than a one-off building.
4. The deposit would not leave you short for tax, wages or a slow quarter.
5. Your lease is near expiry, with a rent reset or relocation looming, so there is a real alternative cost to staying.

When does leasing usually make sense?

• You are growing and don’t yet know your final space or location needs.
• Your cash earns more in stock, equipment or hiring.
• The trade is location-sensitive and could move: a pop-up, seasonal or customer-driven business.
• The building suits you but would be hard to sell, so owning it traps value.
• You want to keep borrowing capacity for other uses.

Leasing is not a failure to build wealth. Many strong businesses lease for decades and put their capital into operations.

What are the middle routes?

• Buy through a property trust or company, lease to the business. Common for owner-occupiers. It can separate asset risk from trading risk, though lenders will typically want guarantees and the rent must be genuine. For super-fund ownership, see SMSF and business property.
• Sale and leaseback. If you already own, selling to an investor and leasing back releases capital. We compare it with borrowing in sale and leaseback vs a business loan.
• Shorter lease with an option to renew. Buys time while you build trading history, and avoids committing to a ten-year term.
• Co-owning with a partner or another business. Splits the deposit, but needs clear exit terms.

What should you negotiate if you keep leasing?

Leasing is not passive. A few clauses decide whether it stays cheap:

• Rent review method. A fixed annual percentage is predictable. A market review at renewal is not, and can reset rent sharply. Know which you have.
• Option terms. A renewal option you hold is worth far more than a hope of renewal. If you are putting in a significant fit-out, ask for the option before spending.
• Make-good. Ask what “reinstatement” means in practice and get it narrowed before signing, because the bill lands when you are leaving and have least leverage.
• Outgoings. Check which are passed through, and whether capital works are excluded.
• Assignment and sale of the business. If you might sell the business one day, the buyer will want the lease. Restrictive assignment clauses cut the price you can get.

Retail and commercial lease protections differ by state, and small business commissioners publish plain-language guidance. It is worth a read before renewing.

What mistakes do owners make in this decision?

Buying because the rent hurts. A rent increase is annoying, but it isn’t a reason to lock capital into a building you wouldn’t otherwise want.

Underestimating the cash left after settlement. A purchase that works on paper can still leave the business without working capital for a quiet quarter. If cash flow is thin, a working capital loan afterwards is a patch, not a plan.

Ignoring the exit. Specialised fit-outs and unusual layouts can limit buyers. Ask an agent who would pay for it.

Leaving the structure for later. Which entity buys, who guarantees, and how rent is set are far easier to design before settlement than after.

What do lenders add to the decision?

Lenders will help you test the buy case more than any rule of thumb. They look at the valuation, which may be lower than the price (see how valuations work), then apply an LVR for the property type. That sets your deposit. If the required deposit hurts, that is itself information.

Banks can be an excellent source for an owner-occupier purchase, often at the sharpest pricing, and it is worth pursuing a bank first if you meet their criteria. Our first-timer’s guide to commercial property loans walks through what to expect.

If you want a quick sense of the numbers, send us the price and your deposit and we can talk through the options.

Before you decide, test three things

1. Run both cash flows over ten years, including rent growth, repairs, and the return on capital you keep.
2. Stress the buy case. What happens if turnover falls 20% for a year, or rates on the loan move?
3. Check the exit. Who would buy this building, and how long would a sale take?

If both options survive, choose the one that keeps the business most resilient, not the one that feels most prestigious.

Ready to see what buying could look like?

A figure on paper beats a feeling. If you’re weighing a purchase, our short enquiry takes about a minute and doesn’t touch your credit file. We keep your details with us rather than passing them to a crowd of lenders, and a real person reads what you’ve entered and calls to talk it through. Be as accurate as you can with the property price, the deposit you could put in and the business’s turnover, so the first option on the table is a realistic one.

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