Own or rent your business premises?

It usually arrives the same way. The landlord is retiring, or restructuring, and offers you first refusal on the building you already trade from. It feels like an opportunity and a threat at the same time, because the alternative is a new owner and a rent review you do not control.

The instinct is to compare the rent to the loan repayment. If the repayment is lower, buy. That comparison is the single most common way this decision gets made, and it is close to useless, because it leaves out the three things that actually move.

What actually changes when you buy the premises

• Rent leaves the profit and loss, which lifts your reported earnings and changes how every lender reads the business.
• Debt service arrives instead, but only the interest portion is an expense. The principal is repayment of your own capital.
• A large asset lands on the balance sheet, and with it a facility that will usually be secured against that asset rather than against the business.
• Your deposit leaves the business, and working capital is often where it comes from.
• Your borrowing capacity moves in two directions at once: up, because earnings improved and you now hold security, and down, because you have taken on the debt.

That last point is the one people miss. Buying the premises does not simply consume your capacity. It can expand it, because owner-occupied commercial property is generally geared more comfortably than a goodwill-heavy business loan, and because the earnings uplift from removing rent is real and permanent. Whether the net effect helps or hurts is an arithmetic question, and it has a different answer for every business.

The comparison that is worth doing

Rent against repayment is not the comparison. This is:

Read the last two rows together. Cover falls a long way, from very comfortable to still comfortable, and the business is roughly $46,000 a year worse off in cash. On those numbers alone, renting wins.

But the table stops too early, because it treats a year as the whole question. Of that $141,800 of debt service, a meaningful share is principal, and principal is not a cost. It is you buying the building from yourself in instalments. Add that back and the picture changes again.

The parts the annual comparison leaves out

• Principal repayment is capital accumulation, not expense. Roughly a third of an early-year repayment on a 15-year facility is principal.
• Rent rises. A lease with fixed annual increases compounds against you for as long as you trade there, and the comparison above only holds for year one.
• The deposit has to come from somewhere. If it comes out of working capital, the business gets tighter in a way the profit and loss will not show you.
• Stamp duty, legal costs and any GST treatment are real and immediate, and vary by state.
• You take on the risks of ownership: the roof, the compliance, the vacancy risk if you ever leave.
• There is a second exit. A business owner with the freehold has two things to sell, and they do not have to be sold together or to the same buyer.

That last one is the reason many owners do it, and it rarely appears in the arithmetic. Selling a business that comes with a lease is a different transaction to selling a business and retaining the building as an income-producing asset. Owners who bought the premises a decade before selling the business frequently found that the building, not the business, was the larger part of what they ended up with.

Rent is money that leaves permanently. Principal is money that changes form. The annual comparison treats them as the same thing, which is why it usually points the wrong way.

When buying tends to work

• The business is stable, and you are confident you will still be trading from this site in ten years.
• The premises are reasonably generic, so if you left, someone else would want them.
• You have the deposit without stripping working capital to do it.
• Your existing debt service leaves genuine room, so the combined position still clears a lender's cover requirement with headroom.
• The rent is at or above market, which means removing it produces a real earnings uplift rather than an artificial one.

When it usually does not

• The site is highly specific to your operation, so its value depends on you staying in it.
• The business is growing fast enough that it will outgrow the building within the loan term.
• The deposit would leave you without a working capital buffer.
• Your earnings are volatile, and a fixed, secured, long-term commitment is the last thing that position needs.
• The rent you pay is already below market, in which case the earnings uplift is smaller than it looks.

One trap specific to related-party rent

If you already pay rent to an entity you or your family control, this decision is different again, and the arithmetic above does not apply cleanly. A lender assessing your business will normalise that rent to market before they assess anything, so the earnings uplift you expect from restructuring may already have been assumed away. This is worth getting looked at properly rather than modelled on the back of an envelope, and it is one of the few places where the tax structure genuinely drives the commercial answer, so your accountant needs to be in the conversation early.

There is no general answer to this question, and anyone offering one is selling something. What there is, is a version of the arithmetic that includes principal, rent escalation and the second exit, run on your figures rather than on an example. That version usually takes an afternoon, and it is a great deal cheaper than getting it wrong for fifteen years.