The return-on-capital case
Should you buy or lease your business premises?
Direct answer
For most growing businesses, leasing beats owning your premises: capital tied up in a building usually earns far less than the same capital reinvested in the business. Owning suits some; for the rest, a long-term lease with a committed landlord gives the security of owning without the opportunity cost.
Owning your premises feels like the responsible choice. But it's worth running the numbers on what that capital could do elsewhere — because for most growing businesses, the building is the lowest-returning asset they own.
Key facts
- The question
- Where does your capital earn most?
- Most growing firms
- Lease — keep capital in the business
- Owning suits
- Specialised, mature, surplus-capital cases
- The third path
- Sale & leaseback — own the upside, free the capital
- Security
- A long lease can match owning
- Note
- General information, not advice
The return-on-capital argument
Capital is finite, and every dollar has an opportunity cost. A dollar invested in your premises earns roughly a property yield. The same dollar invested in your business — inventory, equipment, people, sales and marketing — typically earns your business's return on capital, which for a healthy growing company is usually far higher.
Owning the building converts high-returning business capital into low-returning property capital. The lease payment you avoid by owning is almost always less than what that capital could have earned working in the business.
Illustration only — general information, not financial, taxation or investment advice. Consider your own circumstances and seek advice.
A worked illustration
Suppose your premises are worth a given amount, and that capital is fully tied up in owning them. Owning 'saves' you the rent — call that the property yield on the building. But if your business earns materially more than that property yield on capital it puts to work, every dollar locked in the building is quietly under-earning.
The bigger the gap between your business's return on capital and the property yield, the more owning costs you in opportunity. For many trading businesses that gap is wide.
When owning does make sense
- The premises are highly specialised and central to a stable, mature business.
- Property is a deliberate part of your wealth strategy and you accept the lower return.
- You have surplus capital with nowhere higher-returning to put it.
- You value control above all and are comfortable carrying the property risk.
The third path: convert ownership to capital
If you already own and the maths says the capital should be working harder, you don't have to choose between owning and moving. A sale and leaseback lets you sell to a long-term owner and lease straight back — you free the capital and keep the building.
What about security?
The usual case for owning is security — no landlord can move you on. But a long lease with a permanent-hold owner gives you that same security: genuine tenure, fair reviews, and a partner who's invested in the building lasting. You get the certainty of owning without the opportunity cost.
Common questions
Isn't owning always the safer choice?
How do I compare buying and leasing properly?
I already own — what are my options?
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