Many business owners augment their business success by investing in property. For some, it may just be the purchase of their own home that benefits from their business success, for others it may include owning the premises that they conduct their business from, and for a savvy few they use real estate as a vehicle to both build a bigger asset base and to generate additional sources of income over time. In any case, it pays to have a clear plan for how you are going to use your business profits moving forward.
Some smart questions to start with might be:
1. Do you have excess profits that might be better utilised to invest in real estate?
2. Do you have a business that has lumpy cash-flows for example and perhaps would benefit from a complementary and alternate steady-state income stream.
3. Do you want to keep all your eggs in the one basket or would re-investing some of your business profits into other diversified real assets be a better strategic outcome over the long term?
4. Would the returns from owning your own premises provide greater benefits than leasing/renting your current business space?
The Pros
- Emotionally, there is some comfort in knowing that the business need not be moved unless you want to move it.
- Financially, it may also be advantageous as it could actually cost you less than leasing the same premises would. Additionally, there may be times in your business cycle where you need the flexibility of a reduced or delayed rental payment which is obviously easier to negotiate with yourself than a third-party landlord.
- Tactically, some business premises are even able to be purchased by your Self Managed Super Fund (SMSF) with leverage and rented back to your business/self.
- Strategically, you might also find that the types of premises you require to run your business from now, could also prove to be great sites for re-development into the future providing for significant long-term uplift.
The Cons
- Emotionally, some business owners want the flexibility to be able to scale up (or down) quickly and this may not be as easy to do should you own the commercial premises you operate the business from. Typically, commercial assets may take longer to both sell and lease as the buying pool is typically smaller than the residential property market.
- Financially, typically lenders view commercial assets as being riskier than residential property as evidenced by the amount of deposit that they require for the different asset classes. Typically, deposits of 30 per cent or more are often required to secure commercial property whereas they might only be 10-20 per cent for residential property. Additionally, self-employed persons, or businesses without a long-track record of success, may find it difficult to even access commercial lending at all, or at least on the most favourable terms and conditions.
- Tactically, whilst some business premises are able to provide strong rental yields, they may also suffer from longer vacancy periods, and potentially lower capital growth than some other property asset types.
- Strategically, often the various types of commercial property (e.g retail, office, industrial etc.) are at different stages of their respective economic cycles. Getting the timing wrong could cause you to have an unfavourable outcome.
When it comes to property, are you going to treat it like a hobby or the serious business it can be? And whether that includes residential or commercial property a thorough understanding of the economic and property cycles, a detailed plan and strategy, and a great team of people around you will give you the greatest chance of success.
Matthew Bateman and Luke Harris, Co-Founders, The Property Mentors and co-authors, “Let’s Get Real”
