October 2004 - Business premises: To buy or lease? the never ending question. October 2004 RETURN
We are often asked by our many clients is it better for them to purchase the premises from where their own business is conducted. There is no doubt that by buying a premises with-in ones business or personal structure can be of enormous long term benefit. The advantages one can normally expect are: - to have a secure asset with a reliable income stream; - excellent capital gain; - the elimination of never ending rental increases as the expense is effectively capped to the interest on any borrowings; - more options for effective taxation planning; & - complete control over the business facilities and their development. There are always important considerations to be evaluated before taking a direction to buy or lease. In short, one size will never fit all. We therefore investigate various issues: Is the premises available for purchase at realistic levels? Will the business be in operation for a lengthy period? What are the medium to long term market conditions, are they more conducive to renting or purchasing? Has the business or the proprietor have the financial capacity to purchase? Does the business have a stable property requirement or will changes in activities or volume of trade mean the properties may become unsuitable at a later date? Long term, would investing directly in the business itself with the same capital outlay likely to generate a higher rate of return than the benefits gained by ownership? On the whole, for stable business conditions we normally will recommend purchasing the assets with the cash flow generated by the business, yet holding the asset in an independent entity to both tax plan effectively and safeguard the equity. In the very short term renting may appear the easier option, yet once the business absorbs the initial purchasing expenses, starts to increase capital equity and avoids future rental increases, the benefits of ownership can compound very strongly in your favour. As we often say, why fund someone else’s investment when you can fund your own?
We are often asked by our many clients is it better for them to purchase the premises from where their own business is conducted. There is no doubt that by buying a premises with-in ones business or personal structure can be of enormous long term benefit. The advantages one can normally expect are: - to have a secure asset with a reliable income stream; - excellent capital gain; - the elimination of never ending rental increases as the expense is effectively capped to the interest on any borrowings; - more options for effective taxation planning; & - complete control over the business facilities and their development. There are always important considerations to be evaluated before taking a direction to buy or lease. In short, one size will never fit all. We therefore investigate various issues: Is the premises available for purchase at realistic levels? Will the business be in operation for a lengthy period? What are the medium to long term market conditions, are they more conducive to renting or purchasing? Has the business or the proprietor have the financial capacity to purchase? Does the business have a stable property requirement or will changes in activities or volume of trade mean the properties may become unsuitable at a later date? Long term, would investing directly in the business itself with the same capital outlay likely to generate a higher rate of return than the benefits gained by ownership? On the whole, for stable business conditions we normally will recommend purchasing the assets with the cash flow generated by the business, yet holding the asset in an independent entity to both tax plan effectively and safeguard the equity. In the very short term renting may appear the easier option, yet once the business absorbs the initial purchasing expenses, starts to increase capital equity and avoids future rental increases, the benefits of ownership can compound very strongly in your favour. As we often say, why fund someone else’s investment when you can fund your own?