We get asked this question often.  Our reply is: "It depends".

The Variables to consider include these:

1. Is there a better use for the scarce capital?

Commercial property tends to yield around 8%, and while there could be a capital gain there could also be a loss too.  The big question is - what is the alternative use of the capital?  If the business is growing, what rate of return could be earned on the capital if it was reinvested into the business.  Many businesses earn well about the 8%, but if you have the cash to spare and no better alternative, go for it.

2. What is the business the client is engaged in?

If your business is a specialist one and needs specialised premises, this may limit the options to rent the premises to someone else later.  Alternatively, you may need to spend more money, which is not tax-deductible, to convert the premises to appeal to other businesses.

3. Investment risk!

Many people believe owning premises is not risky, but it may not be easily liquidated and is not diversified (like equities).  On the flip side, they believe they are in control and do not have to negotiate with a landlord eager to increases rents.

4. Compare rent earned and interest paid

Interest at current rates may be less than the rent that may be payable for premises.  So, the rent that would otherwise be paid can be redirected to fund the acquisition and perhaps pay down the loan faster.

5. Up-front costs

Lenders have fairly strict guidelines and the loan may only be for 70% of the lower of purchase price or valuation.  Also, stamp duty, legals and loan fees are payable.  The cost upfront to acquire the property may be 35% to 40%; is that the best use of your capital (see 1), and does it leave you enough working capital?

6. Which entity to buy it in?

This is another 'it depends'.  We consider:

- Should not be in the same entity as the business is operated in, which is simple asset protection, nor probably the personal name of the business owner for the same reason.

- Probably not a company due to their generally disadvantageous CGT treatment.

- A trust can be used as trusts are good for asset protection and qualify for CGT concessions.

- It's hard to go past the tax efficiency of holding a property in a SMSF.  A super fund can borrow, pays tax of only 15% on profits, gets CGT concessions, is efficient for asset protection, and is tax free once an approved pension is being paid.

So, next time you're considering purchasing business premises, these are some of the issues to think about.