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Tuesday / July 16.
HomemibusinessYour Practice Premises: Rent or Buy

Your Practice Premises: Rent or Buy

It can take around 25 years to establish a practice in one location, so from a wealth point of view, it’s worth considering whether to rent or purchase your business premises.

When starting out and setting up a practice, it is understandable that many professionals would choose to lease their premises because of the lower entry costs. But, on the other hand, purchasing your own rooms can potentially be a profitable long-term business and personal investment strategy.

To make an informed choice about which is better for you, a more thorough examination of the risks and rewards of renting versus buying is advisable. Even though it seems like less of a commitment, a five year lease with a five year renewal option can cost as much as an outright purchase of your practice premises.

Renting vs Buying

Whether renting or buying there is more to consider than just the monthly cash flow obligation.

If you decide that you would like to buy your own premises, start by taking practical steps and write down what you hope to achieve…

If you rent, your landlord receives a steady income with the ability to increase the rent at regular intervals. Many landlords also recognise the goodwill value a tenant has tied up in a particular location, so they know the tenant cannot risk relocating. Often, this strengthens the landlord’s position and their ability to achieve above market rentals on your practice premises. You also do not have security of tenure with the landlord capable of requiring you to vacate the premises at the expiry of the rental agreement. This may seriously impact on your practice goodwill should you be unable to find alternative premises in close proximity.

Buying your premises gives you the flexibility of choosing a repayment structure to suit your cash flow, but depending on whether you take out a fixed or variable rate loan, you may risk exposure to interest rate movements affecting your repayments. Your property ownership does however provide you with an excellent asset in your portfolio even at the risk of exposure to fluctuations in the capital value of your practice premises.

Owning your practice premises need not be an inflexible commitment from the perspective of your practice as you always have the option to sell or lease out the premises should you choose to move your practice location.

Add up Repayments

A major advantage when buying your commercial premises is that your interest rate can be fixed, while your landlord will usually not fix your rent. Effectively, purchasing your property fixes your ‘rental’ for as long as you can fix your interest rate. Fixed rate loans of five years or more are not uncommon. Plus, if you have enough equity, you could choose to use your existing residential property as security, resulting in an even lower interest rate. If you purchase your premises, you will never again need to be at the mercy of a landlord and participate in rental negotiations or market-rental reviews – which can reset your rent independently of agreed rental escalations.

Cash Outlay

While renting your premises usually means that you don’t need to have a substantial deposit to set up a practice, don’t underestimate the cash outlays of renting. Your landlord could ask for a deposit of up to six months of rental payments and at least a month’s rent in advance. By comparison, it is possible to own your commercial property with minimal cash outlay. This can be done by financing up to 100 per cent of the purchase price with a specialist financier such as Investec Professional Finance and avoid the need for a deposit and costly mortgage insurance which would be required by most mainstream banks.

Long Term Fit Out

Fitting out your premises will be required whether you rent or buy. Rental premises have a termination date with no certainty of continuity, and you may be required to fit out a new place with added expense. Negotiating a lease term that corresponds to the useful life of your fit-out can be difficult, placing you at risk of being forced to leave the premises before you have had full use of your fit-out. You can have more confidence in fitting out premises that you own with the knowledge that you can stay for the long term.

Security for Your Retirement

Consider your position at retirement. By purchasing your commercial premises, you can create substantial financial security and wealth for your retirement, or even secure an additional income stream. Generally a tenant leaves with nothing.

Often, commercial property offers a higher yield than residential property. If buying, you can sell for a capital gain or retain the property as a commercial investment property, bringing you additional income for your retirement. Your profit can even be magnified by choosing the right structure for the investment, for example through your self-managed super fund.

Take Practical Steps

If you decide that you would like to buy your own premises, start by taking practical steps and write down what you hope to achieve. Speak to your accountant or financial adviser, real estate agents in your area, colleagues who own their own premises, a specialist financier and property buying consultants to get a broad range of opinions. Let your requirements be known to real estate agents as many commercial properties exchange hands without being advertised. And, when doing the maths, remember to consider the time and costs remaining on your current lease commitment to minimise overlap and avoid financial strain. Finally, consider what might be salvageable from your current practice to take with you and seek advice on the suitability of the property before you purchase.

To get the best possible outcome, discuss your needs with finance specialists who have helped thousands of your colleagues take the step to owning their own practices by understanding your profession and evaluating your individual circumstances.

Paul Richardson is a Finance Specialist for Investec Professional Finance. Paul has over 20 years experience in providing financial solutions for business, with over half spent specialising in the medical professions. For more information call (AUS) 1300 131 141.

Investec Experien Pty Ltd ABN 94 110 704 464 (Experien), Investec Bank (Australia) Limited ABN 55 071 292 594 (Investec Bank). All finance is subject to our credit assessment criteria. Terms and conditions, fees and charges apply.